Grim outlook: Will the forint plummet to 400/EUR?

The forint’s exchange rate is under pressure due to soaring inflation rates, an ongoing conflict between the National Bank of Hungary (NBH) and the government, the overall weak performance of the European economy and the debate over EU funding in Hungary.

In a recent interview with SzeretlekMagyarország.hu, László Molnár, CEO of GKI Economic Research Co., shared his cautious perspective on the future of the Hungarian currency. He outlined several factors that are exerting a negative influence on the economy.

Factors endangering the forint

First of all, investors are wary due to the European Parliament’s decision to take Hungary to court over misallocated funds. Furthermore, the central budget seems to be struggling, as well: this year will likely see high budget deficits, despite government claims of strict management of funds.

We wrote last week that the forint took a sharp plunge on Tuesday, reaching a one-year low, and nearly crossing the 400 EUR/HUF psychological barrier. The litigation will likely continue to affect the currency, although by Wednesday, it has stabilised at around 395 EUR/HUF.

As our report highlights, the conflict between the National Bank of Hungary and the Fidesz government might also endanger the forint, with the bank cautioning that the upcoming regulations could jeopardise the institution’s autonomy and stability.

On the contrary, in a recent statement, the National Bank criticised politicians and news outlets that, according to them, shared false speculation about the souring relationship between the bank and the government, highlighting that the governor of the central bank and prime minister Viktor Orbán have a strong working relationship.

“Contrary to the false rumours, Prime Minister Viktor Orbán and central bank governor György Matolcsy have a fair working relationship and continue to hold regular consultations on professional matters as they have in recent years,”

the NBH declared.

Nonetheless, Molnár also calls attention to the importance of government actions, saying that in order to protect the forint, policymakers would need to implement changes that

“support the belief that the Hungarian government is committed, for instance, to keeping the budget deficit under control and to implementing the criteria that the European Union requires and thereby is able to secure the EU resources for the development of the economy, which, obviously, benefits the budget itself through the growth of the GDP.”

However, he also highlights that the previous budgetary interventions of the national bank to maintain GDP growth also contributed to the overheating of the Hungarian economy and connectedly, high inflation rates. The difference, Molnár says, is that at least the bank tried to act – although quite late – to protect against the deterioration of the external balance by raising interest rates. The government, however, did not take any steps.

Import prices to soar in the future?

Ultimately, it is consumers who will face the consequences of these policy mistakes. Molnár predicts that travelling abroad will become more expensive and that the prices of imported goods will also rise. And, as import rates are quite high in Hungary, GKI estimates around 40 percent, devaluation of the currency can itself increase inflation, Molnár explains.

Indeed, as we reported earlier this month, last year, Hungarians spent less on goods per capita than any other EU citizens, due to low real incomes and a high inflation rate. In 2023, the prices in Hungary were over 95 percent of the European Union’s average. Meanwhile, Hungarian incomes remained at half, or in some cases one-third, of EU levels.

Experts from the National Bank warned that unless government fiscal policy changes significantly, these trends might not reverse.

Read also:

• Central Statistical Office published devastating data on the Hungarian economy – HERE
• Hungarian finance minister: Previously blocked EU funds continue to arrive – READ HERE

Source: Szeretlekmagyarorszag.hu