Hungarian Central Bank to Change Benchmark Again Amid Rate Focus

  • Change to benchmark facility will be second in 12 months
  • Policy seen as bid to delay rate increases as long as possible

Hungary’s central bank is preparing to overhaul its benchmark rate for the second time in a year, it said, as policy makers eye unconventional monetary easing after ruling out further cuts to the cost of borrowing. The forint dropped.

National Bank of Hungary Vice President Marton Nagy will brief reporters at 3 p.m. in Budapest on Tuesday about the changes to the three-month deposit benchmark, the monetary authority said in an e-mail. The central bank may cap deposits in the rate or switch to a new six-month facility, according to Szilard Kondora, an economist at OTP Bank Nyrt., Hungary’s largest lender.

The central bank switched to the three-month instrument from a two-week facility last year to avert the need for more interest-rate cuts, with policy makers expressing concern about having to tighten monetary policy later. While rate cuts were ultimately restarted in March to prevent the appreciation of the forint, the monetary authority said last month that it was done cutting and would keep the main rate at a record-low 0.9 percent for an “extended period” following Britain’s vote to leave the European Union.

The central bank may ease monetary conditions by “generating additional banking-sector demand on the bond market” while the BUBOR, the local inter-bank rate, “might even fall below the base rate,” Kondora said by phone. “The timing comes as a surprise, as the forint hasn’t significantly appreciated against the euro and bond yields are at low levels in the wake of the Brexit referendum.”

Forint Falls

The forint reversed gains after the announcement of the briefing and traded 0.2 percent weaker against the euro at 314.09 at 12:53 p.m. The currency has gained 0.5 percent this year.

Critics of the central bank have said the central bank’s aim to turn a profit and support Prime Minister Viktor Orban’s government may push policy makers toward avoiding rate increases as long as possible. Orban, a close ally of central bank Governor Gyorgy Matolcsy, faces elections in 2018.

The central bank has come under scrutiny for its spending, including on luxury properties, and also for channeling money to members of Matolcsy’s family. Policy makers have said they want to keep the main rate stable and avoid a rate increase to make the economic environment more predictable.

“The central bank’s leadership is trying to avoid having to communicate an interest-rate increase during their tenure,” Daniel Bebesy, a portfolio manager at Budapest Alapkezelo Zrt., said in an e-mail.

Hungary’s central bank has said it will support the government’s plan to boost growth, following an economic contraction in the first quarter. Consumer prices dropped 0.2 percent in June. Policy makers target 3 percent inflation.

Before it's here, it's on the Bloomberg Terminal.