Hungary tightens condition for monetary easing

BUDAPEST:

Hungary’s central bank tightened the conditions for monetary easing after cutting borrowing costs to a record low, signaling a cautious approach at new head Gyorgy Matolcsy’s first rate decision that boosted the forint.

The Magyar Nemzeti Bank reduced the two-week deposit rate by a quarter-point to 5 percent today, trimming it for an eighth month and matching the forecast of 25 of 29 economists in a survey.

The cuts can continue if market confidence improves, policy makers said in a statement. The forint weakened as Gyorgy Matolcsy’s appointment as new head of the central bank sparked speculation over the direction of monetary policy, including the possible use of reserves to stimulate the economy and reduce foreigncurrency loans.

“While these are flexible self-imposed rules, we believe they refer to the Monetary Council’s preference of a stronger forint and lower government yields,” Janos Samu, economist at Budapest-based brokerage Concorde Zrt., said yesterday in an e- mailed note. “Given these considerations, we see a high chance of the council keeping the base rate unchanged next month.” Hungary’s currency had weakened as Matolcsy’s appointment sparked speculation over the direction of monetary policy, including the possible use of reserves to stimulate the economy and reduce foreign-currency loans. The country is in its second recession in four years and the central bank yesterday said the inflation rate is headed below its 3 percent target “throughout” the horizon for monetary policy.

The forint strengthened for a third day, rising 0.3 percent against the euro to trade at 303.51 by 10:08 a.m. in Budapest after jumping the most in more than a week after the rate decision yesterday. That pared the currency’s loss in the past month to 2.6 percent against the euro, the worst among more than 20 emergingmarket currencies tracked by Bloomberg.

Yesterday’s comment from the central bank was a departure from last month, when policy makers said inflation in line with the 3 percent target and continuing “favorable market trends” are needed for further monetary easing.

Still, investors stepped up expectations for further rate cuts after yesterday’s decision. The main rate may drop to 4 percent in the next six months, forwardrate agreements indicate.

The bias in the Monetary Council is “clearly for key rate cuts,” while keeping an eye on the exchange rate, according to Nicolaie Alexandru- Chidesciuc, an analyst at JP Morgan.

The central bank will continue to test markets before deciding on unconventional measures, which may include a funding-for-lending program that provides companies with funding at below-market rates, he said yesterday by e-mail from London.

The central bank yesterday cut its inflation forecast for this year while maintaining its economic-growth estimate. Inflation will be 2.6 percent rather than the 3.5 percent forecast in December, with gross domestic product expanding 0.5 percent, it said. Consumer prices may rise 2.8 percent next year, while growth may be 1.7 percent in 2014, it said. Inflation was the slowest in almost seven years in February as the government cut household energy costs. The rate dropped to 2.8 percent, below the bank’s 3 percent target and down from 3.7 percent in January. The bank will publish its full quarterly inflation report tomorrow.

Yesterday’s rate cut was “supported by a very benign new inflation projection,” Pasquale Diana, a Londonbased Morgan Stanley economist, said in a report today. The bank “may well have cut by more at the March meeting, had it not been for a challenging risk backdrop.” Investors were also watching for indications of Matolcsy’s self-styled unorthodox policies being introduced.