Vulnerability: forint faces tough months ahead

During its September meeting, the National Bank of Hungary (MNB) lowered its one-day deposit rate by 100 basis points to 13%. This measure may defend the forint exchange rate from the current fall. The Russia-Ukraine war and energy prices are still a risk, but the currency market is worried about the movement of the US and the dollar.

Meanwhile, the base rate was left unchanged, closing the gap between the two rates one year after the creation of the new facility, and concluding the normalisation of the extraordinary interest rate environment. Hence, from now on, the base rate will return to be the effective bank interest rate, 24.hu reports.

The base rate of 13% is still capable of strengthening the forint in “peacetime”, or at least preventing a substantial weakening. This is conditional on the absence of any turbulence in international markets, the outbreak of a new war or any geopolitical tensions or turmoil, said Miklós Kolba, senior treasury trader at ING Bank. We also wrote about the forint’s current decline HERE.

The current Hungarian base rate is outstanding on global scale as well

“It cannot be compared with the 30% interest rate in Türkiye, but currently Colombia is the only one with a higher benchmark interest rate than ours: 13.25%. In other Latin American countries, and particularly in Asia, interest rates are typically lower everywhere. But Hungary has a big advantage over these “competitors” in that it is part of the European community, which is generally subject to lower benchmark interest rate caps,” says Viktor E. Szabó, Investment Director at Aberdeen Asset Management in London.

However, we are still the riskiest in the region, with the worst credit rating and the highest debt-to-GDP ratio in east-central Europe. To make matters worse, the receipt of EU development funds continues to lag behind, with the country failing to deliver GDP growth since the fourth quarter, while a huge fiscal adjustment is needed. At the same time, inflation has not been reduced as much as communicated.

There are risks that could be bigger than latest clash between National Bank and Government

By the beginning of the summer, the EUR/HUF exchange rate had strengthened to around 370, but since then, it has been hovering between 380 and 390 (and even crossed well above 390 on 28 September). The main reason for this was that the dollar strengthened significantly against the euro in parallel with the US Fed’s interest rate hikes, and rising dollar interest rates tend to have a negative impact on emerging markets.

The debate over EU funding also continues, with some predictions that there could well be no agreement on development funds before the EP elections next June, Miklós Kolba warned.

This means that the Hungarian government has neither external nor internal resources to reduce the budget deficit in any meaningful way, and is unlikely to have them in the near future. There is a high risk that the country’s most important external market, Germany and the eurozone, will go into recession. This will leave little room for manoeuvre for Hungary to grow even with fiscal austerity, 24.hu explains.

In such a situation, it is unfortunate that the MNB and economic policymakers are at odds with or contradicting each other, after last week’s spat between central bank governor György Matolcsy and finance minister Mihály Varga. Moreover, the speeches of economic development minister Márton Nagy and prime minister Viktor Orbán have also worked against predictability.

The Russia-Ukraine war and the gas price hike remain a risk for the forint, but it is worth keeping a watchful eye on America. The dollar has been strengthening since July – weakening the forint.