Hungary’s forint plummeted to historically weak levels against the euro and the dollar on concerns about the National Bank (MNB) ending its tightening policy too early on September 27. There are also worries over the country’s foreign currency reserves falling sharply as the current account deficit is widening due to rising import bills and the impact of the strong dollar on emerging market currencies.
On Thursday, the EUR/HUF rate weakened from 414 to 424, while the USD/HUF rate peaked at 437.4 from 424, a decline of more than 2%.
The Hungarian currency has become the third worst-performing EM currency in 2022 after the Argentine peso and the Turkish lira and by far the weakest in the region, falling 13% in 2022 and by 17% year-to-date from HUF359 against the euro. The EUR/HUF rate was 330 three years ago (-27%), and HUF274 (-53%) in 2010, when the Orban government took power.
In comparison, the EUR/CZK was 25.5 a year ago against the euro, little changed from a year ago and just a euro lower than the 24.6 in 2010. The Polish zloty has depreciated 3.9% against the euro in a year and 20.9% in 12 years.
So far, the market has clearly taken a negative view of the central bank ending its monetary tightening cycle on Tuesday, even after a steeper rate hike, 125bp that brought the base rate to 13%, the highest in Europe, according to analysts.
MNB Deputy Governor Barnabas Virag signalled earlier that the central bank is considering ending the tightening cycle, but it was still a negative surprise for the markets.
Capital Economics said interest rates could rise further as strong wage growth, the widening current account deficit and risks in the global economy put further pressure on the forint.
The MNB’s announcement came after the central bank raised its 2022 and 2023 inflation targets, seeing inflation accelerating to 20% in September from 15.6% in August amid a deepening energy crisis that is putting pressure on the country’s external balance.
Others questioned the efficacy of the MNB’s effort to fight inflation through non-conventional tools to reduce liquidity in the bank sector and said the MNB has constrained its room of manoeuvre with the announcement.
The ECB and the Fed rate hikes will pile further pressure on vulnerable emerging market currencies such as the forint as geopolitical tensions rise and Hungary remains exposed to the energy crisis, while still being locked in a row with Brussels over its frozen Recovery and Resilience Facility and Cohesion Funds.