The Hungarian National Bank (MNB) will use all elements of its toolkit to intervene to ensure the stability of the domestic financial markets if necessary, the central bank told state news agency MTI on March 1, after Hungary’s currency and the stock market went into a free fall.
The escalation of the conflict in Ukraine and the consequent global financial tensions rattled Central European markets as investors went into risk-on mode and sold emerging-market assets.
The Hungarian central bank has criticised the way that the government has been stoking a pre-election boom, which has been pushing up the budget deficit and inflation, and has been pushing up interest rates. The ongoing emerging market turbulence could now mean that Hungary is punished by international investors because of its deteriorating macro-economic fundamentals.
Regional currencies all weakened on Tuesday, with the forint plunging to a new historic low, slipping past 379 to the euro during the day from 371 in the previous day. Over the last five trading days, the Hungarian currency shed 6% of its value. The USD/HUF rate also peaked at a record 340, up 8.1% since the crisis.
Meanwhile, the National Bank of Poland said on March 1 that it carried out a “sale of a certain amount of foreign currencies” in a move to strengthen the zloty, which has weakened in the wake of Russia’s aggression on Ukraine.
Though Central European companies are less exposed to the Russian and Ukrainian markets than they used to be, the market turbulence is hitting the region's currencies and could create inflationary pressures that force central banks to make further interest rate hikes. In the longer term, however, the hit to the global economy could lead central banks to begin easing.
Central European central banks have been among the first in the EU to raise rates over the past year but the Russian invasion and the Western sanctions are expected to drive inflation higher, which could force central banks to raise rates again. Czech Central Bank Governor Jiri Rusnok said last week that he expected the conflict to have a pro-inflationary effect.
"It is an external event, there is nothing we can do," one currency trader said after the forint panic selling accelerated in the early afternoon. Even a rate hike would not help stop the decline, he added.
The Hungarian central bank is closely monitoring the situation and is ready to intervene at any moment, it said. Financial trends across the region are currently shaped by external circumstances, the consequences of an extraordinary military conflict, at the moment, it added.
Data of the recovery period following the coronavirus pandemic show that the fundamentals of the Hungarian economy are strong, the MNB said. "The clear goal of the MNB is to ensure that the increased risks due to the geopolitical circumstances will not jeopardise Hungary's price and financial stability. Money market movements are not justified by fundamentals, but they increase upside inflation risks," the MNB said.
Hungarian stocks also suffered their largest intraday declines since the 2008 economic crisis. Hungary’s largest lender. The benchmark BUX index shed 11% to 38,913.62, extending losses that are now close to 20% since February 22. Technically, the picture does not look good. The BUX index is currently below the 20, 50 and 200-day moving averages.
Hungary's largest lender OTP went into a free fall, down losing 21.5% to HUF10,005, its weakest level since March 2020. Turnover of the share reached HUF59bn, more than 80% of the HUF 72.5bn session total.
CEE’s largest domestic-owned lender, which is present in a dozen countries in the region, has subsidiaries in Russia and Ukraine. The two have accounted 8% of the loan portfolio and 15% of net profit in Q1-Q3.
The sell-off wiped HUF11bn (€30mn) of assets held by chairman-CEO Sandor Csanyi, Hungary’s second-wealthiest man. Kafijat group, owned by the Rahimkulov brothers lost HUF54bn overnight.
Oil and gas company MOL dropped 5.64% to HUF2,444, pharma Richter dipped 5.46% to HUF6,585 and Magyar Telekom fell 3% to HUF404.
The Polish zloty weakened considerably to the US dollar, the euro, and the Swiss franc in the morning of March 1, with gains following after the NBP’s intervention. A week into the war, the zloty has lost around 5% of its value to the main currencies.
“The [recent] depreciation of the zloty is not consistent with the foundations of the Polish economy, nor with the direction of the NBP's monetary policy,” the central bank said in a statement.
“The NBP has an adequate level of foreign exchange reserves and has at its disposal an appropriate set of instruments to counteract negative trends in the financial and currency markets,” it added.
The zloty was trailing 0.2% to the euro in early morning trade on March 2. It also weakened 0.34% to the US dollar and 0.27% to the Swiss franc.
The NBP also said that Poland's economic exposure to Russia and Ukraine is insignificant and should limit the crisis’ impact. A bigger problem is increasing prices of energy commodities, the central bank added.
“In the light of information available, despite the negative impact of increased uncertainty and higher commodity prices, economic growth in Poland will remain strong,” the NBP said.
In Czechia, the koruna depreciated to 25.13 to the euro on March 1.
In an interview in daily Hospodarske Noviny Czech National Bank board member Tomas Holub said inflation in the Czech economy will accelerate, mainly due to the impact of the Ukraine crisis on energy prices, and it could go above 11%,. Therefore it is important to preserve the public’s belief that inflation will return to the central bank’s 2% target, Holub said.
The Czech central bank said last week that it had sufficient tools if it became necessary to stabilise markets and that it was ready to react to curb excessive fluctuations.
The Czech PX index dropped by 2.12%, with Erste Bank down by 9%, Moneta Money Bank down by 2.31%, Komercni Banka down by 2.05%, while arms company Ceska Zbrojovka and anti-virus company Avast saw increases in their shares.