Hungary will probably cut its key interest rate for the first time in three years as it begins to gradually dismantle an emergency monetary regime that halted a forint sell-off and helped rein in runaway inflation.
(Bloomberg) — Hungary will probably cut its key interest rate for the first time in three years as it begins to gradually dismantle an emergency monetary regime that halted a forint sell-off and helped rein in runaway inflation.
The central bank will cut its overnight interest rate by a full percentage point to 17% on Tuesday, according to six of nine economists polled in a Bloomberg survey. It will also keep its base interest rate at 13%.
The base interest rate will be announced at 2 p.m. in Budapest, followed by a statement and a press conference an hour later with central bank Governor Gyorgy Matolcsy when the key rate decision may be communicated.
The forint dropped 0.8% against the euro ahead of the decision, the most among 23 emerging market currencies tracked by Bloomberg.
Unraveling the European Union’s highest borrowing costs — introduced last October to prop up the plunging forint — may reduce economic headwinds that have exacerbated a three-quarter recession while raising the risk of renewed currency depreciation.
While inflation is still close to its highest point this century at 24% in April, the central bank made its intentions to loosen policy clear in April when it lowered the top end of its rate corridor to 20.5%, from 25%.
Central bank deputy Governor Barnabas Virag defended the plan to cut rates last month, saying an improvement in risk perception had opened the way, and reductions can be pursued cautiously and gradually, taking market expectations into consideration.
Money market traders expect the central bank to ease by a little more than 100 basis points over the next month, according to forward rate agreements.
“None of the groups of risk perception that the central bank follows have deteriorated since last month, and some of them improved,“ said ING Bank analyst Peter Virovacz.
Some risks, including uncertainty around the US debt ceiling negotiations and sudden forint weakening could still persuade policy makers to hold off for now.
“If central bankers opt to hold rates for now, they could send a message of being prudent in the face of external risks,” Zoltan Torok, an analyst at Raiffeisen Bank in Budapest.
The forint has gained 6.5% this year, making it one of the best performing currencies globally. Last week, it weakened 1.4% after Foreign Minister Peter Szijjarto said Hungary could block EU financial aid to Ukraine. Those comments may escalate a standoff over billions of euros of assistance earmarked for Hungary that the bloc has frozen over corruption and rule-of-law concerns.
The Hungarian government, which has been urging the central bank to reduce borrowing costs, sees rate cuts as ”a fast way, and perhaps the only way, to relieve pressure on fiscal finances,” NatWest Markets strategist Eimear Daly said.
(Adds central bank briefing in third paragraph, forint in fourth.)
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