Azernews.Az

By Bloomberg

The lowest inflation in almost five decades and unprecedented stimulus in the neighboring euro area is prompting Hungary’s central bank to revisit a pledge to keep interest rates on hold this year.

Hungary’s central bank said Tuesday the economy has moved in a direction that may require lower borrowing costs, after keeping them unchanged for a sixth straight month. That followed a two-year rate-cutting cycle to lift the country out of a recession. Traders are wagering on 21 basis points in reductions during the next three months, derivatives show.

“The central bank’s statement is a hint the door is open to cuts if things get worse,” William Jackson, a London-based economist at Capital Economics Ltd., said by phone Tuesday. “It’s difficult to see why they resisted so far,” as the “monetary council had been the most dovish in the region with its long rate-cut cycle,” he said.

Tumbling oil prices and European Central Bank President Mario Draghi’s pledge to keep buying government bonds until there’s a “sustained adjustment” in inflation have prompted policy makers in Turkey and Poland to signal during the past week that they may lower borrowing costs to stimulate price growth. Goldman Sachs Group Inc. predicted this week that oil prices may fall to as low as $30 a barrel, which would represent a more than 70 percent slump from last year’s peak in June.

Record Low

The yield on Hungary’s 10-year bond rose two basis points to a record 2.77 percent at 12:48 p.m. in Budapest, rebounding from a record-low yesterday. The forint weakened 0.1 percent to 311.57 per euro, paring the currency’s advance to 1.6 percent this month as ECB measures spurred investor demand for higher- yielding assets.

Consumer prices dropped 0.9 percent in December, compared with the central bank’s 3 percent medium-term inflation target. The core inflation rate, which strips out volatile items including energy and food, increased 0.8 percent in December compared with 1.2 percent a month earlier.

Economic growth will probably slow to 2.5 percent in 2015 from 3.3 percent last year, according to a Bloomberg surveys of analysts.

While the current level of the central bank base rate is consistent with achieving the inflation target, “there has been a shift towards the alternative scenario implying looser monetary policy,” rate-setters said in a statement yesterday.

Change ‘Unlikely’

“A rate change in February is extremely unlikely,” Daniel Hewitt, a London-based economist at Barclays Plc, said by e-mail yesterday. The central bank made only minor concessions toward possible monetary loosening, he said.

While Hungary’s stance softens, central banks in Poland and Turkey signaled they may be ready to move on sooner.

Turkey’s central bank, which cut rates by 50 basis points to 7.75 percent last week, may hold an emergency meeting next week if the inflation rate falls by at least one percentage point in January, Governor Erdem Basci said yesterday.

Poland’s monetary council is “not far” from finding a majority in support of monetary easing, central bank Governor Marek Belka said Jan. 23 in an interview with the PAP newswire.

“Significantly lower inflation in the near term opens the door to further policy rate cuts,” Agata Urbanska, a London- based economist at HSBC Bank Plc, said in an e-mailed note yesterday. “The low inflation environment is a significant risk for Hungary. Easing would also be justified by slowing gross- domestic-product growth.”