UPDATE 1-Hungarian minister hopes central bank will act 'responsibly' on rates

Tue Feb 18, 2014 2:40am EST

Related Topics

* Economy Minister Varga says base rates now less appealing to investors

* Central bank holds policy meeting on Tuesday

* Expected to cut by another 10 bps, switch to cautious tone -poll

* Hungary holds parliamentary election in April

BUDAPEST, Feb 18 (Reuters) - The central bank will hopefully assess Hungary's economic situation responsibly when it decides on interest rates on Tuesday, Economy Minister Mihaly Varga said, adding that rate cuts had contributed to the forint's weakness.

Varga told private broadcaster TV2 the currency's recent easing was not justified by the economy's fundamentals. It was due largely due to global economic factors, though the rate cuts had also contributed.

"The level of the (Hungarian) base rate is now less appealing to investors, to those who buy Hungarian government paper," Varga said.

"It is up to the Monetary Council to decide on the base rate. I hope they will assess responsibly the situation of the Hungarian economy - what kind of exchange rate is bearable for the budget, is good for exports and good for foreign currency borrowers."

Hungary holds parliamentary elections in April.

The central bank will announce its policy decision at 1300 GMT.

The bank, all of whose policymakers were appointed under Prime Minister Viktor Orban, has cut interest rates from a peak of 7 percent in 2012 to boost economic recovery, taking advantage of inflation at more than four-decade lows.

Inflation fell to zero in annual terms in January largely on the back of government-imposed household energy price cuts.

Most analysts in last week's Reuters poll expected the bank to cut interest rates by another 10 basis points to a new low of 2.75 percent despite turbulence in emerging markets that exposed the indebted economy's weaknesses.

But several said the bank would probably switch to a cautious tone or could even halt its current easing cycle.

"They will probably still cut 10 basis points today, but what will be really important is what they say afterwards," one dealer said in Budapest.

"The central bank, with an Orban ally at its helm, clearly has a credibility deficit. How much of a one-track mind they have, how well they can assess the reality of the market, will be central. It's clear they will not hike rates before the elections... everything is about the elections now."

But with interest rates only just higher than in Poland, regarded as central and eastern Europe's strongest economy, Hungary may find itself exposed to contagion from other emerging markets as the U.S. Federal Reserve unwinds stimulus.

Hungary has a big current account surplus and a stable budget but analysts say its reliance on foreign funding, fragile growth prospects, and the government's unpredictable policies make it vulnerable to external shocks.

The forint dropped to two-year lows of around 314 to the euro earlier this month and was trading at 308 on Tuesday.

Parliamentary elections take place on April 6 and Orban's ruling Fidesz party has a good chance to be reelected based on all opinion polls, as it has a firm lead over the leftist opposition alliance led by the Socialists.

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