Hungary Readies to Cut EU-High Key Interest Rate: Decision Guide

Marton Kasnyik and Veronika Gulyas, Bloomberg News

(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 may 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. The decision may be announced at a briefing Governor Gyorgy Matolcsy will hold at 3 p.m. in Budapest.

In a possible preview of the move, policymakers reduced the top-end of their interest rate corridor by 100 basis points to 19.5%. They also kept the base rate, which has become secondary to the key rate, at 13% as expected.

The forint dropped as much as 0.9% against the euro ahead of the decision, the most among 23 emerging market currencies tracked by Bloomberg, before paring its loss.

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 at 24% in April is still close to its peak at the start of the year, the central bank has made clear its intention to loosen policy. Deputy Governor Barnabas Virag said last month that an improvement in risk perception had opened the way for policymakers to consider starting monetary easing in May or June.

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.

Lingering 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,” said 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. Traders then said those comments may escalate a standoff over billions of euros of EU aid earmarked for Hungary that the bloc has frozen over corruption and rule-of-law concerns.

(Updates with base interest rate decision and rate-corridor move in third paragraph.)