Hungary Backs Restrained Rate Hike, Walking Forint Tightrope

(Bloomberg) -- Hungary bowed to market pressure and quickened its pace of raising borrowing costs to tackle soaring inflation, but the size of the move left currency traders disappointed. The forint reversed gains after the decision.

The central bank increased the benchmark interest rate by 30 basis points to 2.1%, double the pace of tightening in September and October. It also matched the median estimate in a Bloomberg survey in which rate-hike forecasts were scattered between 15 and 90 basis points. The central bank will publish a statement and hold a briefing at 3 p.m. in Budapest to explain the decision.

Central bankers are balancing currency pressures and inflationary risks associated with Prime Minister Viktor Orban’s pre-election expenditures -- the government aims to spend 15% of gross domestic product ahead of next year’s election -- with the latest data on Tuesday showing a sharp slowdown in economic growth in the third-quarter.

The GDP data may make rate-setters “extra cautious.” ING Bank economist Peter Virovacz said in an emailed note before the central bank decision, predicting the 30 basis-point increase.

While Hungary initially led the European Union with the bloc’s most aggressive monetary tightening campaign during the summer, it fell behind recently as peers in the bloc’s eastern wing picked up the pace. Poland raised its benchmark by 75 basis points this month and the Czechs shocked markets with a 125 basis-point move.

Hungary’s relatively smaller rate hike may continue to pose risks to the forint. The currency dropped 2.1% against the euro last week, the most in the world. It reversed earlier gains on Tuesday to slide 0.2% to 366.5 per euro, within a percentage point of a record low.

Before the rate decision, investors had expected Hungary’s benchmark to rise by 122 basis points in the next three months, according to forward-rate agreements.

Inflation has accelerated to the highest level in nearly a decade in October and fueling worry that the government’s pre-election plans for a $2 billion family-tax rebate and 20% increase in the minimum wage may boost it further.

Governor Gyorgy Matolcsy rang the alarm about economic policy in an op-ed on Monday, saying unrestrained spending undermined investor confidence by fanning inflation and returning Hungary to an era of twin deficits. 

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