Hungary interest rate cut in governor's last meeting

Hungary's central bank cut interest rates Tuesday for the seventh straight month, in governor Andras Simor's last meeting before what markets fear may be a destabilising change of leadership on March 1.

Simor, who has frequently clashed with the government of Prime Minister Viktor Orban and whose term expires Friday, said that he had opposed the lowering of borrowing rates by 25 basis points to 5.25 percent.

But as in the previous six cuts, Simor and two allies were outvoted by the four members on the central bank's seven-member monetary policy committee that were appointed by Orban.

"In most of the developed world, there is very little prospect of economic growth, and that is particularly true in Hungary," Simor said at a news conference.

"This is why the central bank cannot generate economic growth with a policy of monetary easing," he added, also citing concerns the monetary easing could fuel inflation.

Hungary's economy contracted by 1.7 percent in 2012, from growth of 1.6 percent in 2011.

The government forecasts a return to modest growth in 2013 but the European Commission in its latest report last week forecasted a further contraction of 0.1 percent.

Annual inflation declined from 5.0 percent in December, the highest in the European Union, to 3.7 percent in January, the lowest in 16 months, although the figures were distorted by the effects of a tax hike in January 2012.

The rate cut, which left Hungary's currency the forint little changed on Tuesday, was widely expected by economists, who are bracing for monetary policy to be further loosened by Simor's successor after he is named by Orban on Friday.

The man hotly tipped to be tapped for the job, Economy Minister Gyorgy Matolcsy, is a loyal ally of the right-wing premier and is seen by investors as something of an economic maverick.

Matolcsy has repeatedly hinted that his trademark unorthodox ideas, such as the nationalisation of private pension funds and windfall taxes on banks, retailers, and energy companies, would be extended to monetary policy.

Analysts predict Matolcsy's focus would be on getting Hungary out of recession, possibly at the expense of higher inflation and a weaker currency, particularly in the run-up to the next elections in 2014.

Capital Economics in London warned, however, that the scope for further monetary easing will be determined in large part by whether global risk appetite holds up.

"If sentiment turns, either due to a re-escalation of financial market tensions in the eurozone or if the new-look Monetary Council embarks upon more aggressive and/or unconventional policy, the Bank could ultimately be forced into defensive rate hikes to shore up the forint," the report said.

As Simor's term approaches its end, police launched an investigation into the central bank last week on suspicion it provided the International Monetary Fund with confidential information on domestic banks after the lender gave a bailout loan to Hungary in 2008.

The widely respected Simor called the allegations unfounded, politically motivated and "pathetic".