Hungary lowered its key interest rate for a second month as the central bank seeks to ease the toll the European Union’s highest borrowing costs are taking on the recession-hit economy.
(Bloomberg) — Hungary lowered its key interest rate for a second month as the central bank seeks to ease the toll the European Union’s highest borrowing costs are taking on the recession-hit economy.
The National Bank of Hungary cut the overnight deposit rate by a full percentage point to 16%, matching the estimate of all eight economists surveyed in a Bloomberg poll.
The base interest rate, which has become a secondary facility since the introduction of an emergency monetary regime in October to stem the slide of the forint, was kept at 13% as expected.
Policymakers are walking a fine line between their drive to cut interest rates and their goal to rein in inflation, which slowed for a fourth consecutive month in May but still exceeded 20%.
Both the central bank and the government have forecast an inflation rate below 10% by December.
“In the current environment, a cautious and gradual approach is warranted” in monetary policy, the central bank said in a statement.
“If the improvement in risk perceptions persists, the Bank will continue the gradual convergence of the interest rate conditions of one-day tenders to the base rate.”
The central bank’s focus for now is on the forint, which has been among the most volatile globally and has become a favorite carry-trade for investors due to the key interest rate that’s more than double regional emerging-market peers.
The currency appreciated 0.3% to 372.4 per euro by 3:22 p.m.
in Budapest, the best performance among 23 emerging-market currencies after the Philippine peso Tuesday. It has gained 7% against the euro this year and has traded in a tighter range since the May rate cut, which was the first in three years.
The yield on the 10-year government bond fell 8 basis points to 7.26% after the rate cut.
It has dropped 69 basis points in the past month as Prime Minister Viktor Orban introduced a new tax on bank deposits to drive savings into state debt and lower funding costs.
Speaking at a briefing on Tuesday, Deputy Governor Barnabas Virag reiterated a plan to proceed with rate cuts in “gradual steps,” which is widely understood to mean 100 basis points a month to avoid sending the forint into a tailspin.
He said aligning the key interest rate with the 13% base rate in September was “realistic.”
–With assistance from Veronika Gulyas and Zoe Schneeweiss.
(Updates with statement in fourth paragraph, deputy governor in last.)
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