Hungarian forint continues to rise, annual euro peak reached

The Hungarian Forint (HUF) has made an incredible comeback on the international currency market. After a year of tumultuous and drastic price changes, it looks like the HUF is about to stabilise. As of 17 April 2023, the price of the euro (EUR) has almost edged up to where it was one year ago.

The economic and trade crisis which followed Russia’s invasion of Ukraine in March 2022 challenged the stability of HUF. The price of one euro increased all the way to a little bit over 430 forints. This made the Hungarian currency one of the worst-performing ones in the region. Since December however, the forint has started to strengthen exponentially. As we wrote before, while the bank closure crisis in the US in March took its toll, the HUF drew close to achieving the same strength it had just one year ago. The question arises: to what length can this go on, writes Portfolio.

What made the forint so strong?

We can pinpoint several different factors which helped the forint gain back its previous strength. One of the most important ones is the decisions made by the Hungarian National Bank (MNB), the central bank of the nation. To combat rising inflation and help stabilise the currency, the Monetary Council of MNB steadily raised the reference interest rate all the way up to 18 percent in October. This rate is much higher than the ones other EU member states set.

This decision put faith in international businessmen and made the HUF a valuable currency to invest in. On one hand, such a high-interest rate lowers the investment ratio, as it becomes more expensive to afford loans and loan payments. This leads to reduced economic growth or even shrinkage. On the other hand, reduced investment rates and loans help combat inflation and encourage foreigners to buy HUF, as such a high-interest rate makes it profitable for them to keep their savings in forint.

Another important factor that contributes to this exponential rise is the international economic climate. The strengthening of the American Dollar (USD) helped the HUF, which reacts well to such changes. The fact that the Hungarian government managed to reach a settlement with the EU and did not lose (all) the money that could help kickstart the economy again also contributed to increased trust in the HUF and its potential.

How long can this last?

According to experts, while the strengthening of the forint is dazzling, it is reaching its physical limits. They argue that while the high reference interest rate put faith back into the Hungarian economy, the fall in energy prices was also needed for this achievement. As we could see during the banking crisis in March, the forint is still very vulnerable to external forces. Unfortunately, this is not something we have control over. This means a huge risk in the future.

One expert, Zoltán Török expects the HUF to drop a little bit below 370 a euro, but not reach down to 350. The changes in the price of energy might bring the strengthening to a halt at any point. He believes that by the end of the year, one euro will cost around 380-400 HUF.

Another professional, Orsolya Nyeste estimates this value at 370-390. She believes that the Hungarian economy is unable to live with an 18 percent reference interest rate in the long run. We can already see the negative side effects, if inflation drops, the MNB will have to reduce it, she added.