Credit Herald

Hungary’s central bank kept the benchmark interest rate unchanged for a fourth month as policy makers seek evidence that the forint can maintain recent gains.

The Magyar Nemzeti Bank left the two-week deposit rate at 9.5 percent today, tied for the European Union’s highest with Romania’s benchmark, matching the forecast of all 17 analysts in a Bloomberg survey. Poland is also expected to keep its key rate unchanged on May 27. Central Bank President Andras Simor will explain the decision at a press conference at 3 p.m. local time.

Hungary, the first EU country to secure a bailout last year, expects its economy to shrink 6.7 percent this year, the most since 1991. The forint fell to a record in March, prompting policy makers to halt rate cuts on concern that the weakening currency could trigger defaults on foreign-currency loans, hurting bank portfolios and threatening stability.

“An interest-rate cut right now could undermine the strengthening of the forint, which may well have been temporary,” Janos Samu, a Budapest-based economist at Concorde Securities, said in an interview before the rate decision. “A weakening of the currency could unnerve policy makers whose foremost priority is financial stability.”

The forint lost 38 percent against the euro between July and March 6, when it fell to 317.22, its weakest ever. The currency has since strengthened 12 percent and traded at 281.07 at 11:13 a.m., from 279.95 late yesterday.

Policy makers last month voted unanimously to keep the rate at 9.5 percent, saying a “wait-and-see” approach was warranted by financial stability risks and financing difficulties, according to the minutes of the meeting, published on May 8. Minutes from today’s meeting will be available on June 12 pay day loan.

IMF-Led Bailout

Hungary secured 20 billion euros ($28 billion) in International Monetary Fund-led loans in October and the central bank raised the benchmark rate to 11.5 percent from 8.5 percent after investors sold local assets on concern that the country won’t be able to service its debt. The bank cut the rate by 2 percentage points in four steps from November to January.

Prime Minister Gordon Bajnai, who replaced Ferenc Gyurcsany last month, plans a total 1.3 trillion forint ($6.5 billion) in spending cuts in two years to limit budget financing needs.

The government later this year may consider selling foreign-currency bonds to wean itself off emergency financing, Finance Minister Peter Oszko said in a May 19 interview. Hungary has sold forint bonds four times this year after canceling them in October as the financial crisis engulfed the country and froze the local bond market.

Hungary raised 13.5 billion forint at an auction on May 21, selling bonds maturing in 2013, 2015 and 2019. The government was unable to raise the full 15 billion forint it planned, because of a lack of bids. Yields rose for all maturities. The average yield was 10.21 percent on the three-year and five-year bonds and 9.95 percent on the 10-year debt.

“Policy makers will start thinking about rate cuts once the strengthening of the forint is supported by an improvement in the bond market with bigger sales and lower yields, which would suggest that the currency can stay strong on a sustained basis,” Samu at Concorde Securities said.

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