Hungarian policy makers cut the main interest rate for a sixth month, forging ahead with monetary easing after investor uncertainty over a change in the central bank’s leadership in March helped weaken the forint.

The Magyar Nemzeti Bank lowered the two-week deposit rate by a quarter-point to 5.5 percent, the lowest since March 2010 and still the European Union’s highest, matching the forecast of 27 of 28 economists in a Bloomberg survey. One predicted no change.

Prime Minister Viktor Orban is expected to select next month a new central bank chief to succeed Simor, whose six-year mandate expires March 3. Non-executive rate-setters picked by Orban’s lawmakers in 2011 are already in a majority in the rate- setting panel and have wrested control from Governor Andras Simor and his deputies to push through rate cuts to stimulate the recession-bound economy.

“They’re going to keep cutting because the Monetary Council is dominated in terms of numbers by the four external members and they’re obviously fairly dovish,” Nigel Rendell, an analyst at Medley Global Advisors in London, said by phone today. “They’re quite comfortable that the rate can go down further and if it causes weakening in the forint that’s probably backing their case as well.”

Forint Falls

The forint has declined 1.9 percent against the euro this year. Strategists including those at Citigroup and Bank of America Corp. said Hungarian assets may weaken because of the potential shift in monetary policy. The currency rose 0.4 percent to 296.39 at 3:46 p.m. in Budapest.

Investors have pared expectations for rate cuts over the coming year to 98 basis points, compared with 128 basis points on Jan. 3, as indicated by forward-rate agreements for the three-month interest rate in 12 months. A basis point is 0.01 percentage point.

For further rate cuts, “favorable” market conditions need to remain in place and the inflation outlook must be in line with reaching the target of 3 percent of economic output, the Monetary Council said in a statement after the decision.

The central bank’s current monetary-policy toolkit is “sufficient,” rate setters said in the statement, adding that widening the set of “unconventional” policy instruments is only useful in the event of “acute financial-market turmoil.”

The council was unanimous in formulating its opinion on monetary-policy tools, Simor said at a press conference in Budapest today, commending fellow policy makers for recognizing the need for caution.

Undermining Confidence

“Excessive rate cuts and/or monetary-policy measures leading to quantitative easing may undermine confidence and risk sudden forint weakening,” Eszter Gargyan, a Budapest-based economist at Citigroup Inc. (C), said in an e-mailed report sent yesterday, citing slowing inflation.

Further monetary easing after five quarter-point rate cuts should be considered “very cautiously,” the International Monetary Fund said yesterday in a statement after an annual review of the economy. Lower rates are “unlikely to have a material impact” on lending and demand as long as the banking environment remained unchanged, it said. Hungary in 2010 introduced Europe’s highest bank tax.

The new central bank chief should “bravely use unorthodox tools” to provide monetary stimulus, including measures used by the European Central Bank and the Federal Reserve, Economy Minister Gyorgy Matolcsy, Simor’s most likely successor according to the Index news website, said last month.

Orban may name his candidate at a three-day ruling-party retreat that starts Feb. 5, Index reported Jan. 17, without citing anyone.

‘Significant’ Easing

The new leadership is “almost certain” to stop paying interest on commercial banks’ mandatory reserves held at the central bank and will probably cut the rate on two-week bills, Mihaly Patai, the former head of the Hungarian Banking Association and chief executive officer of the local UniCredit SpA (UCG) unit, said Dec. 20, according to the Budapest-based newspaper Vilaggazdasag.

Commercial banks can manage their liquidity using the central bank’s two-week notes that pay a rate equal to the base rate. Cutting the return on this instrument would be tantamount to “significant” monetary easing, Simor told reporters in Budapest Jan. 18.

‘Credibility Problem’

The central bank needs to step up its fight against inflation as policy makers have a “credibility problem” when investors forecast even lower borrowing costs and predict price growth faster than policy makers’ 3 percent target on a two-year horizon, he said. Consumer prices rose 5 percent last month from a year earlier, the slowest pace in a year.

The central bank may pause with rate cuts today because of the forint’s decline and volatility and may resume monetary easing in the coming months at a slower pace than last year and depending on market conditions, according to Intesa Sanpaolo SpA (ISP)’s local CIB unit.

“Improvements in money-market conditions, which were cited foremost in the decisions of recent months, have halted in the past months and this may support keeping the interest rate unchanged,” Sandor Jobbagy, a Budapest-based CIB analyst, said Jan. 23 by e-mail.

Bloomberg