HUF CBank has Room To Move

Hungary’s inflation outlook and the improvement in risk assessment allow the central bank to lower the European Union’s highest benchmark rate, central bankers Andrea Bartfai-Mager, Ferenc Gerhardt and Gyorgy Kocziszky said.

Interest-rate reductions must be cautious and gradual as policy makers seek to move along with market sentiment and avoid forcing anything on it, Bartfai-Mager said in an interview in Budapest today. Cuts shouldn’t exceed a quarter-point at a time, Gerhardt said in the same interview, which included three of the four non-executive rate setters who have driven policy easing since August. The country’s “equilibrium interest rate” is 4.5 percent to 5 percent, Gerhardt said.

The Magyar Nemzeti Bank on Oct. 30 reduced the two-week deposit rate for a third month by a quarter-point to 6.25 percent as concern about a recession outweighed the EU’s fastest inflation and uncertainty about obtaining international aid. Policy makers had a “narrow majority” for the cut over a proposal for no change, MNB President Andras Simor said.

“Favorable developments in risk premiums and the exchange rate are persistent based on currently available information” and provide maneuvering room for monetary policy, Bartfai-Mager said. Accelerating inflation is primarily fueled by first-round effects, which central banks typically overlook, she said.

Developments in the past week “allow for a more relaxed thinking,” Gerhardt said. “At the current level of Hungarian interest rates, the limit of caution is 25 basis points; very powerful reasons would be needed for a cut or increase of 50 basis points.”

Bloomberg

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