Dark prophecy for the Hungarian forint: 400 EUR/HUF soon?

Equilor Investment Consultant Ltd. expects the forint to continue losing value in the coming months. We may see a 400/EUR exchange rate by the end of this year. Having said that, it was also revealed at a press event on Wednesday morning that Equilor does not expect the recession in Hungary to ease by the third quarter of this year. However, the Hungarian economy as a whole could still contract by 0.7%. Although inflation is slowing, it could still be high in 2024.

As we have reported HERE, the forint has been in a steady decline since mid-summer; it fell to the 375/EUR zone. On Wednesday, it was sitting at 385/EUR, and it is still on a downward slope, according to analysts.

Current Hungarian economic climate

As Porfolio reported, the recession may not end until the third quarter of this year. Several factors play a role in this negative trend, but the most prominent of all is the country’s sky-high inflation, which has profoundly destroyed consumer confidence. The fact that the government is further postponing investments does not help either. On top of that, it is understood that a new tax adjustment may be on the cards, too.
Besides all that, Germany’s industrial scene is also struggling. As the most important export market for Hungary, the country’s weak industrial performance has a direct impact on the domestic economy.
On the positive note, real wages are slowly turning upward, while interest rates began to drop. Thus, the economy could likely reboot next year. Another good news is that inflation may be in a single digit by November, while annual inflation could be around 6% next year (compared to this year’s 18%).

Nightmarish forint exchange rate

The high interest rates still support the Hungarian currency, thanks to the proactive measures of the Hungarian National Bank. Although the Hungarian government has lowered the key interest rate significantly, it is still twice as high as the Czech/Polish key interest rate. THE weakening of the forint could be also caused by the faster than expected interest rate cuts. The unfavourable macroeconomic climate (e.g. the recession along with the budget deficit) and the intensifying conflicts with the EU (and with the US) also take a toll on the fragile Hungarian currency.  Only sustainedly high interest rates and a snippet of good news on EU funds could bring about some strengthening at this point. Therefore, Equilor expects the forint to weaken further. It cannot be ruled out that the Hungarian currency may reach the 400 threshold against the euro next year.

In addition, the global real interest rates are not expected to return to the low levels seen in the 2010s, which will also limit the National Bank’s room for manoeuvre.

High inflation and interest rates have held back investment as well as consumption, while the backlog of EU funds is prompting greater difficulties than expected for the Hungarian economy – Equilor analysts said.

Conclusion

There is still a good chance that the forint will close this year below the 400/EUR level, but by the end of 2024, it could further plummet. In a particularly dim scenario, in 2025, it could drop to 405/EUR.