End of EU Spat Gives Hungary Options on Rates

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Hungary will probably keep its base interest rate unchanged after the end of a dispute with the European Union and slowing inflation turns attention to potential easing via other means.

The central bank will keep the rate offered on required reserves at 0.6% and the overnight deposit rate at minus 0.05% on Tuesday, according to a Bloomberg survey. The main focus will be on updated economic forecasts and whether policy makers on Thursday may reduce the one-week deposit rate, the most influential monetary instrument, from 0.75%. Governor Gyorgy Matolcsy will speak at a briefing following the policy meeting.

End of EU Spat Gives Hungary Options on Rates

The pendulum is swinging back toward easing in Hungary after a period of volatile monetary policy. In September, the central bank lifted short-term interest rates to respond to a selloff in the forint that was fueled by two cuts to the base rate.

The shifts in borrowing costs accompany continued stimulus targeting longer interest rates via government bond purchases and cash injections.

The one-week deposit rate is designed to contain the fallout from changes in investor risk sentiment. With the forint recovering to its strongest level since August after Hungary backtracked on its threat to veto the EU budget, wagers have grown that easing may follow.

Forward-rate agreements used to wager on the one-week deposit rate in one month’s time indicate a roughly 50% chance of a reduction to 0.6% in the next month. Analysts at JPMorgan Chase & Co. predict such a move this week.

“The focus will likely turn to normalization between the policy rate and the one on the weekly deposit facility,” Morgan Stanley economists including Georgi Deyanov said in an emailed note. “Lower uncertainty after the agreement with regard to the EU recovery fund, a stronger currency and decelerating inflation should increase the probability of a 15 basis-point cut in the next few months.”

With a resurgence of the coronavirus proving more deadly in Hungary than the initial spring wave, the central bank may cut estimates for economic growth and inflation in its quarterly update of forecasts.

September forecasts202020212022
Inflation3.5% to 3.6%3.4% to 3.6%3%
GDP change-6.8% to -5.1%4.4% to 6.8%4.5% to 5.7%

The central bank will publish its rate decision at 2 p.m. in Budapest, followed by the briefing, a statement and forecasts an hour later.

©2020 Bloomberg L.P.

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