Hungary May Cut Interest Rates to Lowest in 18 Months Today
Hungary’s central bank will probably cut the benchmark interest rate to the lowest in 18 months today to help the first European Union country to secure a bailout last year overcome its worst recession in 18 years.
The Magyar Nemzeti Bank in Budapest will lower the two-week deposit rate to 7.5 percent from 8 percent, a third consecutive monthly reduction, according to 10 analysts in a Bloomberg survey. Two expect a cut to 7.25 percent. The decision will be announced at 2 p.m.
Policy makers have trimmed 1.5 percentage points off the key rate since July and have said they will continue to ease monetary policy as long as financial stability is maintained. The central bank expects the recession to slow inflation to its target next year.
“The current market situation provides sufficient room for the continuation of the easing cycle, without any threat to financial stability,” Gyorgy Barta and Sandor Jobbagy, economists at the Budapest-based unit of Intesa SanPaolo SpA, said in a note to clients.
Twenty of the 53 central banks tracked by Bloomberg eased monetary conditions in the past three months to fight the recession, including east European countries such as Russia, Ukraine and the Czech Republic in August and September.
IMF Bailout
Hungarian policy makers held rates unchanged between January and June to protect the slumping currency. Investors sold off the forint and the country’s stocks and bonds last year, citing concern about the nation’s ability to repay its debt.
Hungary in October secured a 20 billion-euro ($29 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 in an emergency move.
Policy makers rolled back that increase by July, when they resumed rate cuts after a six-month pause as the forint strengthened from a record low against the euro in March. The currency has gained 14 percent since then, making it the fourth- best performer in the past six months of the 26 emerging-market currencies tracked by Bloomberg.
CDS
Hungarian credit default swaps linked to five-year bonds, the cost of protection against a default, fell to 215.5 basis points on Sept. 25 from as much as 638 basis points in March and 408 basis points on April 14, when Prime Minister Gordon Bajnai took over after the recession toppled his predecessor.
Hungary will be able to return to market financing after measures to curb the budget gap regained investor confidence, Bajnai said in an interview on Sept. 23.
“If there’s no sudden downturn in the markets, then I would expect Hungary to be able to fund itself,” he said. “Hungary has understood this crisis, turned around its economy. Hungary will be one of those economies in 2011, 2012 that will come out of this crisis fastest in the region.”
The economy will probably contract 6.7 percent this year and 0.9 percent next year before returning to growth in 2011, according to the central bank. The recession means there is “no inflationary pressure” and the annual rate of consumer price increases is set to fall to the bank’s 3 percent target next year, the central bank said in the minutes of last month’s rate- setting meeting.
The annual inflation rate unexpectedly fell to 5 percent in August from 5.1 percent in July as an increase in the value- added tax rate had a less pronounced impact as retailers were reluctant to pass on the increase to customers because of slumping demand.