UPDATE 1-Hungary cuts rates again, unfazed by weak forint

Tue Feb 18, 2014 8:34am EST

Related Topics

* Central bank cuts by 15 bps to new low of 2.7 pct

* Bank may adopt more cautious tone in statement -analysts

* Inflation at zero in January, economy recovering

* But forint weak, vulnerable to emerging market sell-offs

By Krisztina Than

BUDAPEST, Feb 18 (Reuters) - Hungary's central bank cut interest rates by 15 basis points to a new low of 2.7 percent on Tuesday, more than had been expected given recent weakness in the forint currency.

The bank's policymakers, all appointed under Prime Minister Viktor Orban, ignored Tuesday's warning by Economy Minister Mihaly Varga that the base rate at its current level was already "less appealing to investors" who buy Hungary's debt.

But they may adopt a more cautious tone in a statement due at 1400 GMT, and even signal an end to the central bank's long run of cuts, as regional counterparts have done.

"I expect them to say in the statement that the end of the easing cycle is very near," said Zoltan Torok, an analyst at Raiffeisen.

The forint fell to two-year lows around 314 to the euro earlier this month as worries about U.S. stimulus withdrawal and a slowdown in China battered emerging markets, and is now firmly stuck on the weaker side of the 300 mark.

It eased more than half a percent immediately after the rate cut to 310.50 versus the euro. The cut was bigger than the 10 basis points most economists had forecast.

The central bank has slashed borrowing costs month-by-month to spur the economy from a peak of 7 percent in August 2012, but analysts have warned further cuts could undermine the currency.

Hungary's debt burden, emerging Europe's highest, makes it vulnerable to any sudden souring of investor sentiment as the flow of cheap money from major central banks slows and interest rates in developed countries eventually rise from near zero.

The country has a current account surplus and a stable budget, however, and inflation is at more than four-decade lows. It ran at zero in January after government-imposed energy price cuts, but is forecast to accelerate to 2.5 percent by year-end.

With rates already offering only a minimal yield pick-up over expected inflation, that may prompt the central bank to signal an end to the cutting cycle in its statement.

"If the (central bank) does not signal in a clear way that it is aware of risks and the easing cycle has ended, or will end soon, the forint could come under stronger depreciation pressure if global sentiment worsens," CIB Bank analysts said before the rate decision.

WEAK FORINT A RISK

While a weaker forint could help exports, it would push up repayments on households' foreign currency loans and could become a hot issue ahead of parliamentary elections in April.

Opinion polls suggest Orban's ruling Fidesz party will be re-elected, and it will not want to see a sharp fall in the forint that could cost votes.

Vice-Governor Adam Balog said in January that the central bank would not like a big sudden shift in the forint, although it would only act if forint weakness jeopardised its inflation goal, as long as the currency's moves were gradual.

Hungary's reliance on foreign financing of its debt, the region's highest at 80 percent of output, means a tumble in the currency could trigger a sell-off in Hungarian bonds.

That in turn could force the central bank to make an emergency rate hike as Turkey and South Africa did last month, and as Hungary has done before, most recently in 2008 when it took an IMF bailout.

"Given Hungary's open economy and its elevated foreign-currency debt levels - and the resultant sensitivity to currency movements - the exchange rate is an issue that is widely followed and discussed domestically," Eurasia Group analyst Tsveta Petrova said in a note.

"The remaining level of overall Hungarian FX debt remains both an economic and a political liability..." (Reporting by Krisztina Than; Editing by Catherine Evans)

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