New EU decision might ruin Hungarian forint

Olli Rehn, a member of the Governing Council of the European Central Bank (ECB), believes that the ECB has to implement new measures to stop the record-high inflation in the European Union. Furthermore, the weak euro against the American dollar worsens the energy crisis. Drastic measures seem to be inevitable. However, such decisions might mean the further weakening of the Hungarian forint.

The ECB must act quickly

Mr Rehn, governor of the Bank of Finland, does not stand alone with his opinion. Isabel Schnabel, also a member of the Governing Council of the ECB, and Francois Villeroy de Galhau, the Governor of the Bank of France, both agree with him. They highlighted resolute measures are needed. Some analysts say that might mean a 50-base point increase in the interest rate. Rehn said that the inflation was too high in Europe, so it was high time to act. 

The Hungarian Central Bank already did a drastic base point increase to tackle inflation. However, without visible results. Based on their data, the inflation was 13.7% in July, while the core inflation (which excludes the food and energy sectors) was even higher, 16.6%.

The August figures will probably be even worse since the Orbán administration excluded all business vehicles from its fuel price cap scheme. Thus, they cannot buy fuel for 480 HUF/l. Furthermore, the currency exchange of the Hungarian forint reached the 413-414 zone.

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Rehn believes the GDP growth in the EU will slow down because of the energy crisis. Furthermore, the region has to prepare for a long war in Ukraine. Moreover, the euro weakened by 12% against the USD. Thus, the ECB has to act to help European economies and companies and strengthen the euro as much as possible.

What will happen with the forint?

Considering the foreseeable ECB measures, and the soaring energy prices, the forint’s future is gloomy. The analysts of the ING think the government will terminate the fuel price cap scheme by December. Therefore, inflation will reach a 22% peak by the end of the year. Péter Virovácz and FX-expert Frantisek Taborsky do not expect decreasing inflation until the first half of 2024. They think the central bank’s base rate level will reach 14% by end-2022. That will make loans very expensive. However, that will not save the forint, Virovácz and Taborsky agreed in a recent paper.

To strengthen the forint, the central bank would have raised the mandatory reserve requirement ratio, which is currently at 1%. Meanwhile, it is 2% in Poland. 

Gas prices affect forint significantly, resulting in uncertainties on the financial markets. On the other hand, the experts concurred that an agreement with the European Commission about the EU’s RRF funds would contribute the most to increasing the value of the Hungarian national currency.

Read alsoThe rise and fall of the Hungarian forint

Source: napi.hu