Hungary Seen Extending Easing Push as Rates to Hover Near Low

  • Policy makers may cut deposit cap to 600b forint in 2Q: survey
  • Liquidity surplus pushed forint yields below zero first time

Hungarian rate setters will probably continue easing with unconventional measures next week, despite an uptick in inflation that may take consumer-price growth above the central bank’s target as soon as this month.

Policy makers will lower the limit on three-month deposits they are willing to accept from commercial banks to 600 billion forint ($2.1 billion) in the second quarter from 750 billion forint in the first, pushing more liquidity into the market, according to the median estimate of 11 economists in a Bloomberg survey. That will help keep the three-month interbank offered rate, or Bubor, largely unchanged at 0.23 percent by the end of June, according to forecasts.

Hungary has turned to unconventional easing to boost lending and lift economic growth, while pledging to keep the benchmark rate unchanged at 0.9 percent for an extended period. The cap on deposits, announced last year, together with foreign-currency swap tenders, have lifted the amount of cash in the economy, pushing interbank rates that are the index for most loans to a record low and allowing the nation’s debt-management agency to sell bills at a negative yield for the first time this week.

“A further reduction in the 3-month deposit cap would increase excess liquidity and a larger liquidity surplus would prevent short-term interest rates from reacting to reflation,” said Dan Bucsa, an economist at UniCredit SpA in London.

The National Bank of Hungary’s easing bias has been the main counterweight to appreciation pressure on the forint, as a record current-account surplus and European Union aid inflows boost demand for the currency. Those opposing forces have kept the exchange rate mostly within a three-percent trading range for the last three years, with the forint trading near the stronger side of the band at 308.6 per euro on Wednesday.

The stimulus has also helped temper a drop in corporate lending that has slashed a quarter of all loans since the start of the financial crisis. Households benefiting from government subsidies for home purchases have also started to increase mortgage borrowing amid the low rates and as economic growth rebounds from the slowest pace of expansion in three years.

Accelerating inflation and signs of policy tightening worldwide are making economists question how long policy makers will maintain their stance, including a pledge to ease policy further, if needed. Hungary’s inflation rate will reach the central bank’s 3 percent target already this month, according to half of the respondents. The U.S. Federal Reserve will probably continue gradual rate increases this year, while the European Central Bank left open a window to further rate cuts, despite acknowledging improved prospects for growth.

While the three-month deposit cap will probably be lowered even further to 500 billion forint by the end of the year, according to the median forecast, estimates deviate between an outright ban on parking cash in the facility to a looser limit of 1 trillion forint. That uncertainty is reflected in bets for the three-month interbank rate, where the median estimate of 0.28 percent for the end of the year reflects predictions ranging from 0.05 percent to 0.96 percent.

“So far, the Fed and ECB both seem to be on the dovish side, and that will allow Hungarian policy makers to push more liquidity into the market,” said Gergely Urmossy, an analyst at Erste Group Bank AG’s unit in Budapest. “Should rate hikes formally appear in the ECB’s communication, that would raise a barrier to further reductions in the deposit cap.”

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