Central bank’s decision sent the Hungarian forint soaring

Tuesday saw a brisk rise in the Hungarian forint. The central bank’s communication played a big role in this. It seems that exchange rate stability has become an important priority, which also plays a prominent role in curbing inflation in Hungary.

The central bank’s decision was good for the Hungarian forint

On Wednesday morning, the forint fell below 380 against the euro for the first time since the banking crises interrupted the earlier strengthening trend, napi.hu reports. In addition to the general market calm, the strong message from the Hungarian central bank (MNB) most likely played a major role in this.

At Tuesday’s interest rate decision meeting, the MNB did not change its monetary conditions (we wrote about this in detail here). What is more, Vice President Barnabás Virág stressed that the 18 percent interest rate on overnight deposits is justified for the time being. Meanwhile, the 13 percent level of the base rate cannot be considered low either.

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The forint’s role

The stability of the forint will play an important role in bringing down inflation. A weaker domestic currency also tends to make imports more expensive, thus increasing prices. However, the extent of this depends on the role of imports, napi.hu writes.

One of the main drivers of current inflation has been last year’s energy price explosion, especially in the case of natural gas. The price in euro is now roughly double what it was in previous years. However, the forint is now much weaker and gas is predominantly imported. Thus, the forint exchange rate plays a crucial role in the domestic price of gas. This in itself justifies the need for a stronger forint exchange rate.

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Positive prospects?

Recognising this, the exchange rate has become an important priority for the central bank’s monetary policy, and Tuesday’s interest rate decision confirmed this. During the few weeks of banking panics, it was clear that if there is turmoil and uncertainty in the developed world’s financial system, the forint will be the first to collapse.

As a result, the chances have increased that the forint exchange rate will be stable. It may even return to the strengthening trend that started at the end of last year.