Central bank’s surprising decision: forint starts to strengthen – UPDATED

Hungarian central bank (Magyar Nemzeti Bank, MNB) rate-setters cut the base rate by 75 basis points, to 10.00%, at a regular policy meeting on Tuesday.

According to economx.hu, the cut was lower than the market expected. Experts believed the cut would reach 100 basis points.

In December, the national bank talked about a 100-basis-point cut for January.

According to portfolio.hu, the forint struggled on Monday because the EU heads threatened Hungary with new economic sanctions provided PM Orbán does not vote for Ukraine’s financial aid. As a result, the forint hit the 390/EUR level. That has been unprecedented since last autumn.

Since the monetary council of the national bank did not accelerate the pace of the base rate cut, the forint started to strengthen after the MNB’s announcement.

Thanks to the lower base rate cut, the forint strengthened to 387/EUR in the afternoon. This morning, the Hungarian national currency opened the day at 389.4/EUR.

Read also:

• Hungarian forint has fallen to a low we have not seen for months – Read more HERE
• Transparency International’s shocking finding about corruption in Hungary – Details in THIS article

UPDATE: Thanks to the lower base rate cut and the good news concerning the EU summit and a possible Hungary-European Council agreement about the Ukraine aid in Brussels, the forint went below 384/EUR by Wednesday evening.

Disinflation is expected to continue

The Council also decided to lower the symmetric interest rate corridor in tandem, bringing the O/N deposit rate to 9.00 percent and the O/N collateralised loan rate to 11.00 percent.

In a statement released after the meeting, the Council said the country’s risk perception continued to improve “despite a volatile global sentiment”, allowing the base rate to continue to be lowered.

They said Hungary’s risk perception improved further despite a “volatile global sentiment” thanks to “the trend-like improvement” in the country’s current account balance, and the current account balance-to-GDP ratio improved by more than 8 percentage points in 2023.

The Council said “the utilisation of new export capacities built recently and the improving global economic environment” were expected to give new impetus to exports in the coming years. The inflow of EU funds, they added, would contribute to boosting Hungary’s net lending and an increase in central bank foreign exchange reserves.

Disinflation is expected to continue in the first quarter and inflation “is likely to approach the upper bound of the tolerance band in the spring months”, the Council said.

“In the coming months, decisions on any further reductions in the base rate and their optimal pace will be made on the basis of this information, in a data-driven manner,” they added.

At a press conference after the meeting, deputy bank governor Barnabas Virag said improvements in macroeconomic fundamentals could have allowed a bigger cut, but said “noise” on money markets that started a week ago Monday had justified the 75 basis point option.

PM Orbán: Brussels blackmails EU members if they diverge on war, migration, gender

Prime Minister Viktor Orbán has told French weekly Le Point that Hungary offered to compromise regarding the financing of Ukraine but this was not well received, and member states that diverged from the EU on the issues of war, migration and gender, were blackmailed by “imperialist Brussels”. In the interview published on Tuesday, Orbán said Hungary maintained its stance that no military solution to the war in Ukraine was foreseeable and a ceasefire and peace talks were necessary.

Other EU member states, however, tended towards a military solution and recommended the EU hand over 50 billion euros to Ukraine over four years, he added.

Sovereign Hungary, he said, opposed the related budget amendment, yet the other member states did not recognise this sovereign right, and were attempting to put pressure on the government and blackmail it into supporting the financing package.

Hungary, Orbán added, was prepared to sign up to the deal if member states could decide unanimously each year whether or not to continue sending the money to Ukraine.

This was not about blackmailing the bloc with its veto but about restoring and maintaining EU unity, he said.

Asked about how Hungary’s position had been received, Orbán said: “If I understand correctly, the Financial Times published … the response, which was hardly positive.”

Orbán: EU becoming increasingly imperialist

The prime minister said the reaction in Brussels to Hungary acting like a sovereign country was to mount a massive financial blockade and link the Ukraine issue to the rule of law, “even though they have nothing to do with each other”.

Put to him that a senior European Council official had dismissed the Financial Times information, Orbán said: “We’re not just out of kindergarten”. If the document published in the FT describes a financial blockade against Hungary in detail, “such a scenario exists for sure”, he said.

Orbán accused the EU of becoming increasingly imperialist rather than “a community of sovereign states”, and he charged the European Commission with waging an ideological war against Hungary. Its complaints about Hungarian migration and gender policies have nothing to do with corruption or the quality of justice, he added.

“It’s clear that the real bone of contention with Hungary isn’t the rule of law.”

Hungary will lose its voting right?

Stripping Hungary of its vote in the European Council would be possible only in the case of a rule-of-law violation, he said, adding that Ukraine was an unrelated issue.

Orbán said European institutions did not take the rule of law seriously but used it as a tool to blackmail countries that wanted to preserve their sovereignty and hold their own opinions.

He said the argument of other EU member states that annual financing would prevent Ukraine from planning its spending over four years could be taken seriously but was “unacceptable”.

It is hard to predict what would happen in the next few months “let alone in another four years”, he said, adding that it was unknown what the US role would be after the November presidential election.

Europe needs Trump

Referring to the upcoming European Parliament elections, Orbán said the opinion of Europeans would be bypassed if a decision on funding for Ukraine were made today. The 50 billion euros in question would be “very useful for the people of Europe”, he said, adding that the continent was “increasingly suffering due to the poor performance of the economy”.

Asked about Donald Trump’s re-election prospects, Orbán noted that he had said in 2016 that Europe needed Trump since it was usual in international politics that the basis of decision-making was the national interest.

Even without the war, “Ukraine is a serious problem for Europe”, he said, arguing that closer ties with the EU, or even its accession, could have “a catastrophic effect” on European economies, especially its agriculture.