Future of Hungarian forint still uncertain

Slowly but steadily, the crisis of the Hungarian forint is coming to an end. After a year of constant volatility, the currency is now becoming more and more stable. Having survived the panic created by the bankruptcy of numerous important financial institutions in the last 2 months, a steady 370-380 EUR-HUF exchange now seems like the most probable outcome for the near future.

However, this apparent stability is upheld by strict measures taken by the Hungarian National Bank (MNB) to protect the forint from collapsing. These have been in place for several months now. While they successfully defended the currency, they are causing damage in other economic areas. Having recognised this, the monetary council of MNB started loosening the restrictions placed on the forint. With the easing of these measures, can the Hungarian forint stand on its own legs? Or will this cause just more volatility, Index asks.

The beginning of the end

Russia’s invasion of Ukraine last year put the HUF through the wringer. Now, after months of strict decisions to stop the inflation of the currency, the recovery begins.

On 25 April, the MNB began the lifting of restrictions. They cut back the upper limit of the interest rate corridor by 450 basepoints. While this in itself is not a drastic change, it is a sign that the loosening of measures has started.  We can now expect more to come in the next months.

“Considering the decisions taken by MNB and the way they communicate, market players may get the idea that the central bank will handle the beginning of the interest rate reduction carefully,”

said Sándor Jobbágy macroeconomics analyst.

While the original shock caused the HUF to devaluate, by Saturday noon, it has regained its strength. At the time of the writing of this article, one euro cost HUF 373.

Careful decisions

And careful they have to treat it. The decisions taken in the next few months will drastically influence the future of the Hungarian currency.

If the lifting of restrictions is too fast and too drastic, it is possible that inflation will start increasing again, as more money floods the market. If they come too late, however, it can cause long-lasting problems for the entire economy, as investment and consumption drop.

Capital market expert Márta Balog-Béki is optimistic about the Hungarian currecy’s future. She believes that the reduction in the prices of energy, the weakening of the US dollar and the decision made by the central bank to not start lowering interests too early all contributed to the current stability.

While the forint is not expected to get any stronger than it is right now, that could change soon. If the Hungarian government reaches an agreement with the European Union, that will cause a large amount of euros to flood the market, possibly further strengthening the HUF.

Source: Index