Hungary May Cut Key Rate to 3-Year Low on Recession, Inflation
Hungary’s central bank will probably cut the benchmark interest rate to the lowest in more than three years today to speed the country’s recovery from its worst recession in 18 years, which helps keep inflation in check.
The Magyar Nemzeti Bank in Budapest will lower the two-week deposit rate to 6.5 percent from 7 percent, reducing it for the fifth consecutive month, according to the forecast of 21 economists in a Bloomberg survey. One forecasts a cut to 6.75 percent. The decision will be announced at 2 p.m.
Policy makers shaved 2.5 percentage points off the key rate since July and said there is a room for further cuts as the economic slump blunts price pressures. Hungary was the first European Union country to get an International Monetary Fund-led bailout last year to avert a default during the credit crisis.
“The current market situation still provides sufficient room for the continuation of the easing cycle, without any major threat to financial stability,” Gyorgy Barta and Sandor Jobbagy, Budapest-based analysts at Intesa Sanpaolo SpA, said in a note to clients.
The forint fell to a record low against the euro in March. It has since been the sixth-best performer of the 26 emerging market currencies tracked by Bloomberg in the past six months, having gained 2.5 percent.
GDP Drops
Hungary’s economy contracted an annual 7.2 percent in the third quarter, worse than the 6.6 percent economists estimated, easing from a 7.5 percent slump in the second quarter. The central bank forecasts an economic contraction of 6.7 percent this year, the biggest decline since 1991.
The inflation rate fell to 4.7 percent in October from 4.9 percent in September as the recession muted the price-boosting effect of a July increase in the value-added tax. The central bank expects the rate to “significantly undershoot” its 3 percent target next year as demand falls instant payday loan.
“Cautious” interest rates cuts are “possible and desirable,” central bank Vice President Ferenc Karvalits told reporters on Nov. 16. Forward-rate agreements show investors expect the key rate to fall to 5.8 percent within the next six months.
Hungary’s interest rate cuts are trailing central banks such as the U.S. Federal Reserve and the European Central Bank as well as countries in the region including Poland and the Czech Republic because policy makers looked to defend the forint after investors sold off local assets during the credit crisis.
Poland, Czech Repulic
Poland will keep its benchmark rate at 3.5 percent on Nov. 25, according to all 18 analysts in a Bloomberg survey. The Czech central bank left its key rate at 1.25 percent on Nov. 5.
Hungary in October secured a 20 billion-euro ($29.6 billion) emergency loan from the International Monetary Fund, the EU and the World Bank and the central bank lifted the benchmark rate to 11.5 percent from 8.5 percent to avert a default.
Policy makers rolled back that increase by July, resuming rate cuts after a six-month pause as the forint strengthened from a record low against the euro in March as investor confidence began to recover after the government announced spending cuts.
Prime Minister Gordon Bajnai is cutting 1.3 trillion forint ($7.1 billion) in spending over two years to reduce the country’s financing need, in line with pledges to the IMF to limit the budget deficit. The cuts allow the central bank to pursue a “less restrictive” monetary policy, Finance Minister Peter Oszko said on Nov. 19.