Hungary Keeps Policy Unchanged, Ignoring Record-Low Forint

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Hungary left its monetary policy unchanged as central bankers looked past the weakest forint on record in anticipation that surging inflation will slow. The forint extended losses.

The Monetary Council kept interest rates on hold Tuesday, as expected, also maintaining parameters of unconventional measures used to influence money markets. And for the first time since June, it changed language on its policy outlook, signaling heightened scrutiny of inflation, which hit a seven-year high in January.

“The necessity of further measures will be determined by the persistent change in the outlook for inflation, which will be monitored closely by the Monetary Council.”

The policy makers also repeated a signal that it will next review its toolkit March. Inflation shocks have prompted investors to reassess the monetary-policy outlook across eastern Europe in the last month, even if central bankers have said price pressures are mostly related to more volatile oil and food prices.

The central bank’s wording on inflation is similar to signals used last year, when Hungary was preparing to tighten financing conditions. While headline inflation has approached the top of rate setters’ tolerance band, core price measures have slowed.

“The change in wording is more an affirmation that the central bank is monitoring the inflation outlook,” said Peter Virovacz, an analyst at ING Group NV in Budapest. “I don’t think it was intended as a message that a change in policy is being considered.”

Forint Loss

The statement didn’t convince investors that tighter monetary policy is in the works, with the forint extending losses back toward the record-low against the euro reached on Monday. The currency slipped 0.2% to 337.96 per euro after the statement, compared to 0.2% gains for the Polish zloty and the Czech koruna.

According to the central bank, Hungary’s inflation rate will exceed the 4% tolerance limit in the first quarter before slowing back toward the 3% goal in the medium term.

Forward-rate agreements, used to wager on future interest-rate levels, have climbed higher in recent weeks, pricing in about 40 basis points of tightening in the next 12 months.

“A dichotomy remains between the factors determining likely developments in inflation,” the central bank said in its statement. “In its monetary policy decisions, the Monetary Council applies a cautious approach.“

To contact the reporter on this story: Marton Eder in Budapest at meder4@bloomberg.net

To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Michael Winfrey, Andras Gergely

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