Hungary’s national currency was in freefall on July 6, trading at 417 versus the euro, losing 1.5% of its value, when the Hungarian National Bank announced that it will carry out a rate hike at the tender for the one-week deposit rate on Thursday. The verbal intervention helped the forint pare losses, and the forint was back to levels seen earlier in the day.
“The central bank stands ready to use all elements in its toolkit to intervene in the interest of ensuring price stability,” Deputy Governor Barnabas Virag told state news agency MTI, trying to calm markets after a hectic day on the interbank market.
The Hungarian currency at some point was trading at 410 against the dollar, a 3% decline in one day. The USD/HUF kicked off the week at 384. The forint weakened to 421 against the Swiss franc from 410 on Wednesday morning and 400 on Monday.
The situation that has developed in financial markets increases inflation risks and "clearly puts price stability at risk", Virag said.
His comments suggest that the MNB will not stand idle and will carry out a significant increase in the one-week deposit rate significantly on Thursday, according to analysts. Virag did not specifiy the size of the rate-hike.
Policymakers raised the base rate by 185bp and the one-week deposit rate last week by 50bp, bringing both rates to 7.75%. The higher-than-expected increase in the base rate had a fading effect on the forint.
Although some analysts had blamed the MNB for not stepping up more aggressively against inflation, the underlying problems of the forint are beyond the scope of monetary policy and caused by Hungary’s external vulnerability, financial website Portfolio notes.
Hungary had a trade deficit for the tenth month in a row 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 on the release of the RRF funds are the main concern of the market. Business sentiment has deteriorated since April, after the supermajority election victory of the ruling party.
The markets reacted positively to political stability, but the mood shifted quickly to gloom as details emerged on the fiscal rebalancing. Measures involving windfall taxes did not impress investors.
The MNB, which has for long urged the government to show restraint in its pro-fiscal policies and reduce the deficit targets at a faster clip, had to react to the slide of the forint, which has been one of the worst-performing currencies this year.
In the last six months, it lost 20% of its value, ranking closely with the Turkish lira and the Argentine peso. Officially it does not have an exchange rate target and for years it has lived comfortably with the depreciation of the forint.
Economic policymakers have argued that the weaker currency is good for Hungary’s export-oriented economy, but others stressed that it masked the competitiveness gap of smaller manufacturers. Multinational firms, such as big automakers with a 90% plus export share, have also benefited from the depressed rates and the advantages of a cheap labour force.
Recession fears pushed the greenback to the highest levels since 2002. With more tightening by the US Federal Reserve and the ECB, Hungary’s central bank will need to follow suit to stabilise the forint.
Hungary’s central bank is under pressure to raise rates further and reduce negative real interests, but a more aggressive hike could stifle growth. The MNB raised its GDP growth forecast in the fresh report to 4.5-5.5% in 2022, driven by growth in consumption. In the March report, it put growth at 2.5-4.5%.