BUDAPEST (Reuters) - Hungary's central bank kept interest rates steady for a seventh consecutive month on Tuesday as an escalating euro zone crisis poses risks to confidence in the forint, overruling calls by some rate-setters for looser policy to shore up a weak economy.
The start of talks with the IMF last week after an eight-month delay had boosted optimism about Hungary's finances and raised the chance of a rate cut on Tuesday although most analysts in a Reuters poll had expected no change.
"The volatile risk environment and above-target inflation for an extended period continue to warrant a cautious policy stance," the rate setting Monetary Council said in a statement.
The Council reiterated that it would consider a rate cut if Hungary's risk premium falls "persistently and substantially" and the outlook for inflation, now above 5 percent, improves.
Central European countries are coming under pressure to cut interest rates as a weak euro zone, the region's biggest trading partner, is depressing demand for their exports and analysts expect Hungary, which was raising rates last year to support the forint, to cut rates later this year.
The Czech Republic cut its key rate to a new record low last month while Poland kept policy on hold this month but some Polish rate setters have since called for monetary easing.
Hungary's benchmark rate is the highest in the European Union at 7 percent but investor confidence in the country is still shaky following a series of unorthodox policy measures and tax changes.
Central bank Governor Andras Simor told a news conference that the bank considered a 25 basis point cut but a significant majority of the committee voted for no change.
However, he said support for easing had increased from June, when only one of the bank's seven rate setters voted for a cut. The forint firmed slightly to 288.10 by 1326 GMT from 289.10 before the rate decision, while government bond yields climbed a few basis points higher.
"While real economy trends (GDP, consumption and investments) could warrant a rate cut, existing stability and inflation risks do not allow a rate reduction," said Gergely Suppan, an analyst at Takarekbank.
"We continue to expect the inflation target to become achievable by early 2014, therefore, after the closure of IMF talks a rate cut cycle can begin."
IMF TALKS IN FOCUS
Junk-rated Hungary, strapped with central Europe's highest debt and with its export-driven economy on the brink of recession, needs outside help to cut its high borrowing costs and avert a market blowout.
The arrival of an IMF/EU delegation last week for talks on a financial backstop prompted a rally that lifted the volatile forint to its strongest levels since early May. The negotiations, however, are expected to be difficult, spanning several months.
Simor said on Tuesday that the government needs to secure a backstop as soon as possible to curb financing risks.
This week the forint retreated and Hungarian risk premiums have inched higher as global risk appetite has been dampened by worries that Spain might be the next euro zone member to need a full-blown international bailout.
That probably supported the more hawkish members on the central bank's monetary policy panel, including Governor Simor and his deputies, appointed under a previous government. The current government has repeatedly criticized the central bank for keeping rates too high.
With Hungary's economy looking to be headed for recession after shrinking 1.2 percent in the first quarter from the final quarter of last year, support for a rate cut among policymakers has been rising and the Council is increasingly split.
Two of the bank's four rate-setters appointed by the parliamentary majority of the ruling Fidesz party have said the start of loan talks with the IMF and the EU could create room for a rate cut.
Inflation though is well above the central bank's medium-term target of 3 percent and hit 5.6 percent in June. Analysts polled by Reuters expect interest rates to fall to 6.5 percent by the end of the year, building on the assumption that a credit deal with the IMF/EU is reached.
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The start of talks with the IMF last week after an eight-month delay had boosted optimism about Hungary's finances and raised the chance of a rate cut on Tuesday although most analysts in a Reuters poll had expected no change.
"The volatile risk environment and above-target inflation for an extended period continue to warrant a cautious policy stance," the rate setting Monetary Council said in a statement.
The Council reiterated that it would consider a rate cut if Hungary's risk premium falls "persistently and substantially" and the outlook for inflation, now above 5 percent, improves.
Central European countries are coming under pressure to cut interest rates as a weak euro zone, the region's biggest trading partner, is depressing demand for their exports and analysts expect Hungary, which was raising rates last year to support the forint, to cut rates later this year.
The Czech Republic cut its key rate to a new record low last month while Poland kept policy on hold this month but some Polish rate setters have since called for monetary easing.
Hungary's benchmark rate is the highest in the European Union at 7 percent but investor confidence in the country is still shaky following a series of unorthodox policy measures and tax changes.
Central bank Governor Andras Simor told a news conference that the bank considered a 25 basis point cut but a significant majority of the committee voted for no change.
However, he said support for easing had increased from June, when only one of the bank's seven rate setters voted for a cut. The forint firmed slightly to 288.10 by 1326 GMT from 289.10 before the rate decision, while government bond yields climbed a few basis points higher.
"While real economy trends (GDP, consumption and investments) could warrant a rate cut, existing stability and inflation risks do not allow a rate reduction," said Gergely Suppan, an analyst at Takarekbank.
"We continue to expect the inflation target to become achievable by early 2014, therefore, after the closure of IMF talks a rate cut cycle can begin."
IMF TALKS IN FOCUS
Junk-rated Hungary, strapped with central Europe's highest debt and with its export-driven economy on the brink of recession, needs outside help to cut its high borrowing costs and avert a market blowout.
The arrival of an IMF/EU delegation last week for talks on a financial backstop prompted a rally that lifted the volatile forint to its strongest levels since early May. The negotiations, however, are expected to be difficult, spanning several months.
Simor said on Tuesday that the government needs to secure a backstop as soon as possible to curb financing risks.
This week the forint retreated and Hungarian risk premiums have inched higher as global risk appetite has been dampened by worries that Spain might be the next euro zone member to need a full-blown international bailout.
That probably supported the more hawkish members on the central bank's monetary policy panel, including Governor Simor and his deputies, appointed under a previous government. The current government has repeatedly criticized the central bank for keeping rates too high.
With Hungary's economy looking to be headed for recession after shrinking 1.2 percent in the first quarter from the final quarter of last year, support for a rate cut among policymakers has been rising and the Council is increasingly split.
Two of the bank's four rate-setters appointed by the parliamentary majority of the ruling Fidesz party have said the start of loan talks with the IMF and the EU could create room for a rate cut.
Inflation though is well above the central bank's medium-term target of 3 percent and hit 5.6 percent in June. Analysts polled by Reuters expect interest rates to fall to 6.5 percent by the end of the year, building on the assumption that a credit deal with the IMF/EU is reached.
yahoo.com
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