UPDATE 1-Unfazed by IMF doubts, Hungary cuts rates again

Tue Oct 30, 2012 9:10am EDT

Related Topics

* Third 25 bps cut in as many months, main rate falls to 6.25 pct

* Concerns over weak economy trump CPI, market risks

* Economists, markets losing faith in IMF credit deal

By Gergely Szakacs and Marton Dunai

BUDAPEST, Oct 30 (Reuters) - Hungary's divided central bank cut interest rates for the third successive month on Tuesday, shrugging off inflation and market scepticism over whether the indebted country will secure an international financing backstop.

The decision by the seven-strong panel to cut official borrowing costs by another 25 basis points to 6.25 percent shows newer dovish members appointed by parliament last year are firmly focused on pushing the economy with lower rates.

The forint eased slightly to 284.75 immediately after the decision from 284.51 before the announcement.

Governor Andras Simor and his deputies, picked under a previous government, were outvoted at the past two meetings by policy makers appointed last year by parliament, where Prime Minister Viktor Orban's Fidesz holds a two-thirds majority.

The division of Tuesday's vote will not be known until Nov. 14.

"As in the two previous meetings, the decision will likely be split with the four external MPC members voting as a block to cut and the three internal MPC members voting against a cut," said analyst Daniel Hewitt at Barclays Capital.

"We retain our view that gradual rate cuts will continue at least until the rate reaches 5.0 percent. After that, further rate cuts are possible if the external risk environment is favourable and the exchange rate is stable," Hewitt said.

Analysts polled by Reuters expect the base rate to fall to 6 percent by the end of the year.

Tuesday's cut was in line with analyst expectations in a Reuters poll last week even as the survey showed for the first time chances of Budapest securing an International Monetary Fund safety net are seen at just 50-50.

That is in stark contrast to the beginning of the year when, with the volatile forint at record lows, most analysts said an IMF backstop was inevitable, and would be a precondition for any rate easing.


Market doubts were fed on Monday when Hungary's minister in charge of the credit talks said "life would go on" without an IMF deal even though the government was still aiming for an agreement it first requested nearly a year ago.

Dovish rate-setters, who now clearly dominate over Governor Simor and his deputies, are scrambling to aid the economy which is expected to produce one of the weakest growth rates in central Europe in 2013 after a recession this year.

This camp has argued that weak demand in the economy would keep a lid on inflation, which rose to its highest in more than four years at 6.6 percent last month due to higher food and fuel prices as well as government tax increases.

Simor's camp has called for cautious policy due to inflation and market risks in the absence of an IMF and European Union safety net which could curb borrowing costs and restore confidence harmed by years of unorthodox fiscal policies.

The forint is still central Europe's top gainer with a 10 percent rise for the year, bolstered by the prospect of a credit deal and monetary easing in the United States and the euro zone which has fuelled appetite for risk.

But it has lost about 2.5 percent to the euro since the National Bank of Hungary began its monetary easing cycle in August and analysts have said any escalation of the euro zone debt crisis or a shift in sentiment could put it under pressure.

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Comments (1)
dareconomics wrote:
Hungary Cuts Rates for Growth Amid EU’s Highest Inflation – Bloomberg.

When last we visited little Hungary and the forint, its central bank was cutting rates in an attempt to stimulate growth in the face of a recession. Its inflation rate is rising, but its growth is shrinking; this condition is known as “stagflation.”

Hungary is proverbially between a rock and a hard place. Its main trading partner, the EU, is in the midst of a recession reducing demand for its goods. At the same time, the loose money policies of the developed world’s central banks have caused food and energy price inflation.

As you can see from the chart above, the effects of this inflation are milder in richer countries, because food and energy account for less of a share of disposable than in poorer ones.

In Hungary, food accounts for nearly one fifth of the typical household’s budget. This is nearly three times the ratio as that of the U.S. and twice that of Germany.

The best way a central bank can deal with stagflation is to raise interest rates until inflation is halted. The problem with this action is that it will cause a very deep recession, and Hungary is already reeling from one with 1.2% contraction in GDP for the latest quarter. Tightening could cause a depression.

Central bank action is creating many unintended consequences. The worst of which is political instability in the world. One of the causes of the Arab Spring was food and energy price inflation. Hungary has a deeply divided electorate, and people should pay attention to unfolding events there.

(Referenced chart is here: http://dareconomics.wordpress.com/2012/10/30/hungary-and-unintended-consequences-ii/)

Oct 30, 2012 11:25am EDT  --  Report as abuse
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