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BUDAPEST, July 7 (Reuters) – Hungary’s central bank on Thursday raised its one-week deposit rate by 200 basis points to 9.75% and the government pledged to contain the budget deficit in a bid to support the forint after it plunged to record lows this week.
Reviving the currency is a major challenge for Prime Minister Viktor Orban’s government as Hungary’s twin deficits and lack of access to EU funds prompt investors to sell the forint amid deteriorating currency. sentiment in international markets.
Fears of a Europe-wide recession and the prospect of a worsening energy crisis contributed to the forint’s slide.
The National Bank of Hungary said in a statement that its 200 basis point hike was aimed at avoiding the risk of high inflation persisting longer due to the situation in the financial markets, and signaled a possible hike in interest rates. basis for July 12. The weekly deposit rate “should be brought into the base rate tightening cycle as soon as possible,” the bank said.
“The rapid reduction of the spread between the base rate (currently at 7.75%) and the one-week deposit rate will be discussed at the next meeting of the Monetary Board on July 12,” the bank said, adding that it would also hold a currency swap. tender providing foreign currency liquidity on Friday.
“By maintaining an active presence in the market, the BNH enhances the effectiveness of monetary policy transmission, thereby supporting the achievement and maintenance of price stability.”
The forint firmed to 405 from 410 after the comments, moving away from its all-time low of 416.90 hit on Wednesday.
Peter Virovacz, analyst at ING, said Hungary’s current account deficit, coupled with the lack of agreement on the release of frozen EU funds, highlighted the country’s deteriorating risk profile. .
This has led to a decoupling of the forint from its Central European peers – the forint depreciating by around 9% this year, while the Polish zloty has only depreciated by 4%.
In an effort to talk about the forint, Orban’s chief of staff told a briefing that the government was committed to meeting its budget deficit targets this year and next, and aims to wrap up the talks with the European Commission on releasing EU funds as soon as possible. .
Gergely Gulyas said the talks had progressed as Hungary made concessions on four issues, but a deal was unlikely to be reached until the fall.
“What we can do is stick to our projected fiscal deficit target,” he said of the forint’s slide, adding that Hungary – which relies mainly on Russian gas – is would also seek to diversify its energy imports.
The forint has been on a weakening path for weeks, complicating the central bank’s efforts to rein in double-digit inflation and exposing Hungarian assets to any changes in negative sentiment caused by the war in neighboring Ukraine and the soaring energy costs.
Hungary’s current account deficit is expected to widen to 5.6%-6.6% of GDP this year, compared to 2.2%/GDP in the Czech Republic and a deficit of 1.5% of GDP in Poland. Hungary’s public debt level is around 77% – well above 42% of GDP in the Czech economy and around 56% in Poland.
Hungary will release June inflation figures on Friday which are expected to show annual inflation rising to 11.5% despite government-imposed caps on fuel prices, energy bills and foodstuffs. base. The central bank expects inflation to peak in the fall, but a weak forint poses additional inflation risks.
Although the economy is still driven by strong domestic demand, rising inflation and borrowing costs are expected to slow next year.
Hungarian bond yields also jumped this week, with the 10-year yield at around 8.80%, but traders and analysts said investors were holding onto forint-denominated government bonds.
A Reuters poll showed on Wednesday that the forint could gradually recover next year, if EU funds start flowing, inflation slows and external risks ease. Read more
Reporting by Krisztina Than and Anita Komuves; Editing by Toby Chopra, Barbara Lewis, Carmel Crimmins, Alexandra Hudson
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