bne IntelliNews – Hungarian central bank scrambles to support sinking forint

Hungary’s central bank rushed to support the forint on July 7 as the currency became the target of speculators amid deteriorating emerging market sentiment and concerns over the country’s macroeconomic vulnerabilities.

The Hungarian National Bank (MNB) raised its one-week deposit rate by 200 basis points to 9.75% and strongly hinted that it would raise the base rate at its next meeting on July 12.

“It is deemed necessary that the increase in the one-week deposit rate be integrated as early as possible into the base rate tightening cycle. The rapid reduction of the spread between the base rate and the one-week deposit rate will be discussed at the next meeting of the Monetary Council on July 12,” the MNB said in a statement. Last week policymakers had raised the base rate by 185 basis points and the one-week deposit rate by 50 basis points, bringing both rates to 7.75%, already the highest rate in Central Europe.

The bank added that it will start using swap tenders providing foreign currency liquidity in quarters. The first call for tenders will take place on July 8.

These moves stabilized the forint, which was trading at 402 to the dollar on July 8, down from 384 at the start of the week, but up from nearly 410 on July 6.

In addition, the hard-right government of Prime Minister Viktor Orban indicated on July 7 that it would take further steps to reduce the budget deficit, which exploded due to pre-election budget giveaways at the start of the year, now accentuated by new subsidies to reduce the impact of rising energy and food prices.

The central bank remains focused on the threat of inflation, aggravated by the fall of the forint. Inflation soared due to rising prices for imported energy and foodstuffs, which the government simply tried to conceal with temporary price caps. Hungary’s CPI growth was 10.7% year-on-year in May.

Growth remains strong, giving the central bank leeway to raise rates without fear of triggering a recession. The MNB raised its GDP growth forecast in a recent report to 4.5-5.5% in 2022, driven by the growth in consumption.

The economic crisis is putting additional pressure on the Hungarian strongman to strike a deal with Brussels over Hungary’s violations of the European Union’s rule of law, which has led to the freezing of EU reconstruction funds. EU, which could represent 0.6% of GDP in 2022 and 2023.

Concerns over Hungary’s deteriorating fiscal and current account deficits have led to Hungary being named the most vulnerable country in Central Europe to financial market worries about rising inflation and deteriorating growth, triggered by Russia’s invasion of Ukraine and the imposition of Western sanctions.

Hungary recorded a trade deficit for the tenth consecutive month in April and the current account deficit is on track to reach almost 7% of GDP. That compares with 2.2% of GDP in the Czech Republic and a deficit of 1.5% of GDP in Poland, Reuters reported.

In May, Orban’s government announced windfall taxes aimed at collecting HUF 800 billion from companies in eight sectors, including energy, retail and airlines, but such temporary solutions are not did not impress investors.

Hungary also remains one of the most indebted countries in Central Europe, with a level of public debt of around 77% – well above 42% of GDP in the Czech economy and around 56% in Poland, according to Reuters. S&P pointed out that Hungary must repay or refinance 11.5% of its GDP per year. Rising financing costs could increase by 1.6% of GDP by 2025, an additional burden of 800 billion HUF (2 billion euros).

Actions by the European Central Bank and the US Federal Reserve have worsened investor flight from emerging markets, pushing bond yields higher and putting pressure on currencies across the region. Emerging markets have seen $4 billion in releases in June as fears of a coming global recession have grown, the Institute of International Finance said in a July 6 update.

However, the forint has decoupled from its Central European peers – the forint depreciating around 9% this year, while the Polish zloty is down just 4%, Reuters reported. Hungarian bond yields also jumped this week, with the 10-year yield at around 8.80%

The MNB was the first central bank in the EU to begin the current tightening cycle, but it has now been overtaken by others. However, in Hungary, monetary policy was also undermined by the government’s continued loose fiscal policy.

Real interest rates are negative across the region and analysts expect further increases.

The National Bank of Poland (NBP) increased its benchmark rate by 50bp to 6.5% on July 7, below market expectations for a rise of at least 75 bps. Analysts said the NBP had slowed the pace of monetary tightening – after a series of five increases ranging from 75 bps to 100 bps – on fears another sharp rate hike could hurt Poland’s already sluggish growth .

July 7 The Central Bank of Serbia raised the benchmark interest rate in addition, by 0.25 percentage point, to 2.75% as part of its tightening policy.

On July 6, the National Bank of Romania (BNR) surprised the market with a 1pp price increase which brings the refinancing rate to 4.75% and the Lombard rate to 5.75% – which is still far behind the inflation rate (14.5% y/y in May.

The Czech central bank remains the most hawkish in the region after the MNB. The NBC increased its base rate by 1.25 pp to 7% last month to contain inflation, although new Governor Ales Michl has indicated he will try to limit further rate hikes. Czech inflation reached 16% year-on-year in May, above the CNB’s forecast of 14.9%.

Laura T. Thrasher