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By Bloomberg

Hungary’s central bank is focused on the inflation outlook and may continue cutting interests rates after the forint dropped to a four-month low, according to Gyula Pleschinger, a member of the policy-setting panel.

“There won’t be much debate in the Monetary Council that there’s room for further easing” if there’s no significant change to the inflation outlook in the central bank’s report this month, Pleschinger said by phone Wednesday. “The weakening of the forint since yesterday doesn’t frighten us, it doesn’t have such a big impact on the inflation outlook.”

The monetary authority, which last month cut borrowing costs to a record low, is in the midst of a policy overhaul that’s rattling the currency. The forint weakened as much as 1.2 percent on Tuesday after the National Bank of Hungary in Budapest said it would start using a new benchmark rate from September, switching to a three-month instrument from a two-week rate as its main tool.

Policy makers cut the two-week deposit rate to 1.65 percent from 1.8 percent on May 26, the third consecutive 15 basis-point cut. They then signaled that the inflation outlook allowed for further “cautious” easing. The central bank will publish its forecasts on the day of the next rate meeting, June 23.

Consumer prices fell 0.3 percent from a year earlier in April, the eighth month of declines. The slide has been slowing since inflation hit minus 1.4 percent in January. Central bankers target a rate of 3 percent in the medium-term.

Inflation ‘Uncertainty’

“There’s a high degree of uncertainty because of the volatility of oil and unprocessed food prices,” Pleschinger said. The 2915 average inflation rate will be zero, according to the median estimate of 19 economists surveyed by Bloomberg. The main interest rate will fall to 1.5 percent by the end of the year, according to a separate poll of 13 analysts.

In September, the monetary authority will start using a new benchmark, a move it says is designed to steer commercial lenders to buy government debt instead of depositing funds at the central bank.

The forint traded at 311.95 per euro at 1:21 p.m. in Budapest, having strengthened 0.1 percent from yesterday’s close. The plan to change the benchmark sent three-year bond yields below rates on similar Polish notes for the first time since 2002.

The forint may reverse losses as investors recognize that the move to a new benchmark will reduce Hungary’s reliance on foreign funding, Pleschinger said. External financing has been cited by rating companies for keeping the country’s junk grade.

Government debt was 76.9 percent of gross domestic product at the end of 2014, one of the highest ratios among European Union nations that don’t use the euro. Thirty-eight percent of it was denominated in foreign currency, according to the Debt Management Agency.

“Investors will recognize that the change of benchmark instruments doesn’t have to lead to a weaker forint,” Pleschinger said. “If the result is that the country’s budget financing will be less reliant on foreign sources, then this may reduce Hungary’s external vulnerability and have a positive effect on local assets, including the forint.”