Bemoaning the "unjustified" slide of the forint, one of Magyar Nemzeti Bank's new deputy governors heavily hinted on March 13 that the central bank will not implement a large cut in interest rates at the new regime's first rate setting meeting later this month.
"The recent exchange rate fluctuations are not justified by fundamentals and unwelcome for Hungary's economy," Adam Balog said in a written response to questions posed by the Wall Street Journal, in his first press comments since his appointment last week by new MNB chief and former economy minister Gyorgy Matolcsy. The forint has lost over 4% through the week, as investors fret over policy moves by both the central bank and Budapest.
On March 11, Prime Minister Viktor Orban's government leveraged its large parliamentary majority to push through constitutional changes that the EU and US have expressed grave concern over. The next day, the PM announced plans to start reducing forex debt - the one remaining shackle on Budapest's instincts to roll out its "unorthodox" policies due to the sensitivity of households and businesses to the exchange rate. He also suggested the government would like to nationalize a chunk of the banking sector.
All of that has seen the forint rapidly losing ground. On March 13 the currency slid to HUF307.29 against the euro, its weakest since January 2012, when the country was under extreme market pressure due both to Budapest's controversial policy and fears of a global downwards spiral. Today, it is only the hunt for yield due to the liquidity washing around the world that is keeping investors plugged into Hungary.
Yet Budapest continues to lay heavy bets that such sentiment will continue, despite the start of action from the Fed and ECB to wind that capital back in.
The appointment of Matolcsy - seen as the main architect of the "unorthodox" economy policy - is one of those. The MNB chief has promised a "strategic partnership" with the government, which is desperate to turn recession into growth ahead of elections in 2014. That has seen an easing cycle ongoing for several months now, despite the currency risk.
While the world talks of currency wars between states seeking to spark new life into their export markets, the new MNB deputy tells the WSJ that the central bank has no preferred level for the forint. Hungary has a floating exchange rate regime, thus the exchange rate is defined by market demand and supply conditions, Balog insists, claiming that the central bank examines the impact of the exchange rate movements on the economy and the financial system, which is also shaped by several other factors.
"Thus we cannot speak about preferential forint exchange rate levels," he said, before adding: "However, we don't consider hectic exchange rate movements that are not justified by fundamentals as desirable."
Yet with the level of forex debt in the country remaining a brake on policy, Balog's suggestion that the MNB will not increase the pace of easing suggests there are constraints. With Matolcsy taking over from the hawkish Andras Simor earlier this month, and inflation dropping rapidly, the market is braced for a deep cut, but Balog claims that's not likely.
The central bank will probably cut interest rates by not more than 25 basis points on March 26, Balog indicates. "The cautious and gradual approach proved good and there's no reason to change on that proven, cautious and careful practice," the deputy governor says.
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