bne IntelliNews – Hungarian central bank intervenes to stop the forint’s fall

Hungary’s national currency was in freefall on July 6, trading at 417 against the euro, losing 1.5% of its value, when the Hungarian National Bank announced it would raise rates in the bidding for the one-week deposit rate on Thursday. . The verbal intervention helped the forint pare its losses, and the forint returned to the levels seen earlier in the day.

“The central bank is ready to use all elements of its toolbox to intervene in the interest of ensuring price stability,” Deputy Governor Barnabas Virag told state news agency MTI, trying to calm the markets after a turbulent day in the interbank market.

The Hungarian currency was at one point trading at 410 against the dollar, a 3% drop in one day. USD/HUF started the week at 384. The forint weakened to 421 against the Swiss franc, falling from 410 on Wednesday morning to 400 on Monday.

The situation that has developed in financial markets increases inflation risks and “clearly endangers price stability”, Virag said.

His comments suggest that the MNB will not sit idle and will make a significant one-week deposit rate hike on Thursday, analysts said. Virag did not specify the extent of the rate hike.

Policymakers raised the base rate by 185 basis points and the one-week deposit rate by 50 basis points last week, bringing both rates to 7.75%. The stronger than expected rise in the base rate had a dampening effect on the forint.

Although some analysts have criticized the MNB for not acting more aggressively against inflation, the forint’s underlying problems go beyond monetary policy and are caused by Hungary’s external vulnerability, financial site Wallet Remarks.

Hungary recorded a trade deficit for the tenth consecutive month in April and the current account deficit is on track to reach 7% of GDP. Higher energy bills and the long-running dispute with the EU over the release of RRF funds are the market’s main concern. The business climate has deteriorated since April, following the election victory of the ruling party by a qualified majority.

Markets reacted positively to political stability, but the mood quickly soured as details emerged on fiscal consolidation. The measures involving exceptional taxes did not impress investors.

The MNB, which has long urged the government to show restraint in its pro-fiscal policies and cut deficit targets faster, had to react to the fall of the forint, which has been one of the worst performing currencies. this year.

Over the past six months, it has lost 20% of its value, ranking closely with the Turkish lira and the Argentine peso. Officially, he has no exchange rate target and for years he lived comfortably with the depreciation of the forint.

Economic policymakers have argued that the weaker currency is good for Hungary’s export-driven economy, but others have pointed out that it masks the competitiveness gap for smaller manufacturers. Multinational companies, such as large automakers with an export share of over 90%, have also benefited from depressed rates and the advantages of cheap labor.

Recession fears have pushed the greenback to higher levels since 2002. With further tightening from the US Federal Reserve and the ECB, the Hungarian central bank will have to follow suit to stabilize the forint.

Hungary’s central bank is under pressure to raise rates further and reduce negative real interest, but a more aggressive hike could stifle growth. The MNB raised its GDP growth forecast in the new report to 4.5-5.5% in 2022, driven by consumption growth. In the March report, he estimated growth at 2.5-4.5%.