Cut

Hungary plays safe, decides against rate cut

Reuters News
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Posted: Jul 24, 2012 8:13 AM
Hungary plays safe, decides against rate cut

BUDAPEST (Reuters) - Hungary's central bank kept interest rates steady for a seventh consecutive month on Tuesday as renewed worries about the euro zone pose risks to confidence in the forint, overruling calls by some rate-setters for looser policy to shore up a weak economy.

The start of talks with the IMF last week after an eight-month delay had boosted optimism about Hungary's finances and raised the outside chance of a rate cut on Tuesday although most analysts had expected no change.

While the bank's benchmark interest rate is the highest in the European Union at 7 percent, investor confidence in Hungary is still shaky following a series of unorthodox policy measures and tax changes, and could be further undermined by a rate cut.

Central European countries are coming under pressure to cut interest rates as a weak euro zone, the region's biggest trading partner, is depressing demand for their exports and analysts expect Hungary, which was raising rates last year to support the forint, to cut rates later this year.

The Czech republic cut its key rate to a new record low last month and while Poland kept rates on hold this month some Polish rate setters have since called for monetary easing.

Junk-rated Hungary, strapped with central Europe's highest debt and with its export-driven economy on the brink of recession, needs outside help to cut its high borrowing costs and avert a market blowout.

The arrival of an IMF/EU delegation last week for talks on a financial backstop prompted a rally that lifted the volatile forint to its strongest levels since early May. The negotiations, however, are expected to be difficult, spanning several months.

This week the forint retreated and Hungarian risk premiums have inched higher as global risk appetite was dented by worries about Spain's finances.

That probably supported the more hawkish members on the central bank's monetary policy panel, including Governor Andras Simor and his deputies, appointed under a previous government.

The forint was unchanged against the euro after the rate decision, trading at 289.10.

"The risk-off sentiment has already triggered major losses for the forint since Friday, and negative IMF headlines might cause additional discontent during the second half of this week," Commerzbank said in a note.

Simor will hold a news conference about the decision at 1300 GMT.

POLICYMAKERS SPLIT

With Hungary's economy looking to be headed for recession after shrinking 1.2 percent in the first quarter from the final quarter of last year, support for a rate cut among policymakers has been rising.

Two of the bank's four rate-setters appointed by the parliamentary majority of the ruling Fidesz party have said the start of loan talks with the International Monetary Fund and the EU could create room for a rate cut.

The government has repeatedly criticized the National Bank of Hungary in the past for keeping its rates too high. The monetary policy committee however is split.

Julia Kiraly, one of Simor's deputies, told Reuters on July 12 that the outlook for inflation - running at an annual 5.6 percent in June - and the start of aid talks with the IMF/EU do not justify a rate cut and premature easing could undermine the bank's credibility.

Analysts polled by Reuters expect interest rates to fall to 6.5 percent by the end of the year, building on the assumption that a credit deal with the IMF/EU is reached.

(Reporting by Gergely Szakacs; Editing by Susan Fenton)