Hungary’s central bank cut its main interest rate for a second month amid a deepening economic slump, shunning concern about the European Union’s fastest inflation and stirring divisions among policy makers.

The Magyar Nemzeti Bank reduced the two-week deposit rate to 6.5 percent, still the EU’s highest, from 6.75 percent, matching the forecast of 17 economists in a Bloomberg survey. Twelve forecast no change. MNB President Andras Simor will comment on the decision at 3 p.m., when the Monetary Policy Council will also publish a statement on how the bank’s new quarterly inflation and economic forecasts may impact policy.

The central bank last month lowered the main rate for the first time since April 2010 as the four non-executive members of the Monetary Policy Council, appointed by Prime Minister Viktor Orban’s allies in parliament, outvoted Simor and his two deputies. With the economy mired in its second recession since 2009, Hungary is in talks to obtain a loan from the International Monetary Fund.

“With the IMF ‘engaged,’ they probably have the edge over the hawks, including Governor Simor,” Timothy Ash, head of emerging-market research at Standard Bank Group Ltd. in London, said in an e-mail after the vote, referring to the council’s non-executive members.

Underscoring divisions on the council, Simor on Sept. 13 called the cut “pointless” with inflation at double the bank’s 3 percent target. The move cast doubt on the bank’s commitment to tackle price growth and did little to boost an economy held back by subdued lending and investments, he said.

Best Performer

The forint has been the world’s best-performing currency this year as investors bet the government will obtain an IMF backstop. The currency rose 11.2 percent against the euro even after dropping 2 percent from its level before the Aug. 28 rate cut. The forint traded at 283.2 per euro at 2:04 p.m. in Budapest, down 0.2 percent from yesterday. It plunged 15 percent, the most in the world, in the second half of last year.

Hungary’s cost to insure debt for five years with credit default swaps fell to 386 basis points today from 423 basis points before the August rate cut and compared with 630 basis points on June 5. The yield on the government bond maturing in 2022 dropped 23 basis points to 7.23 percent in the period.

Investors are pricing in further rate cuts this year. Forward-rate agreements used to bet on three-month interest rates in three months dropped to 6.22 percent before the rate decision, the lowest in a year. The contracts traded 69 basis points below the three-month Budapest Interbank Offered Rate, indicating a year-end rate of as low as 6 percent.

Regional Peers

As demand for exports wanes in the 17-nation euro region amid the sovereign-debt crisis, the Czech central bank on Sept. 27 may cut its main rate to 0.25 percent from 0.5 percent, already a record low. The Romanian central bank may keep its main rate unchanged at 5.25 percent the same day, the median estimate of economists in Bloomberg surveys show.

Hungary’s rate cut may clash with the central bank’s new forecasts in its quarterly inflation report, to be published at 3 p.m. in Budapest, which will probably boost estimates for price growth.

The inflation rate may fall to the target in 2014 instead of 2013 as estimated in the bank’s June report, Simor said July 24. The August rate rose to 6 percent, the highest since Jan. 2010, led by food and fuel prices.

Deeper Slump

Hungary’s economy shrank 1.3 percent in the second quarter from a year earlier, after contracting 0.7 percent in the three months through March. Industrial production fell 2.2 percent in July from a year earlier as the economy plunged into a deeper recession than previously forecast.

The Cabinet’s measures over the past two years, including a special tax on lenders and nationalization of private-pension funds, damaged investor confidence, contributed to a lowering of the country’s credit rating and a cut in investments.

Hungary requested aid in November as its debt was downgraded to junk. Negotiations for a loan of about 15 billion euros ($19.4 billion) were delayed multiple times because of Orban’s resistance to adhere to legal and economic conditions set by the IMF and the EU.

Hungary is expecting to conclude negotiations by November, chief aid negotiator Mihaly Varga said in an interview published in the Magyar Nemzet newspaper Sept. 22.

Orban rejected IMF aid after coming to power in 2010 only to ask for help after debt auctions failed and the forint plunged to a record. Financing pressures have eased since the European Central Bank on Sept. 6 pledged to buy the bonds of troubled euro nations to help resolve the region’s debt crisis.

Bloomberg