Hungarian Forint Climbs after Central Bank’s Decisions

On Thursday, the Hungarian central bank hiked its deposit rate for one week by a whopping 200 basis points, which saw it hit 0.75%. The government also announced that it would control the budget deficit in order to provide support to the Hungarian currency, which went down to record lows in the week.

Reviving the forint

The government of Prime Minister Viktor Orban has to deal with the challenge of reviving the forint, as the country’s twin deficits, plus no access to the funds of the European Union is driving investors to sell the currency due to worsening investor sentiment across markets.

The forint has also been under pressure because of the possibility of a worsening energy crisis and fears of a recession all over Europe. A statement from the National Bank of Hungary said that the purpose of hiking the interest rate by 200 basis points was to ensure that the high rates of inflation do not persist for long because of the financial market situation.

In fact, the central bank also added that there could be a hike in the base rate on July 12th. It said that the increase in the deposit rate needs to be integrated with the tightening cycle of the base-rate, as quickly as possible.

Forint’s movements

After the comments from the central bank, the Hungarian forint firmed from 410 to 415, as it moved away from 416.90, which is an all-time low value that it reached on Wednesday. According to analysts, the risk profile of the currency is getting worse because of no agreement about the release of funds with the EU and the current account deficit.

Therefore, the Hungarian currency has decoupled from other Central European currencies, as it has shed almost 9% since January this year, while only a 4% easing was seen in the Polish zloty. In order to give the forint a much-needed boost, the premier’s chief of staff said that the government would be closing talks with the European Commission regarding the release of funds soon.

He also said that their goal was to meet their targets of the budget deficit this year, along with the next. According to Gergely Gulyas, there has been significant progress made in the discussions with the EC and concessions had also been made. However, the deal would not happen before autumn.

Vulnerabilities

For weeks, the forint has been on a decline, which has complicated the efforts of the Hungarian central bank to reduce inflation that has reached the double digits. Plus, sentiment in the country has also turned negative because of the war in Ukraine and the increasing energy costs.

The current account deficit of the country is also expected to increase this year. The inflation figures of Hungary in June are also scheduled for publishing on Friday and are expected to see an increase to 11.5%. This is despite the fact that the Hungarian government has imposed caps on prices of energy bills, fuels and basic foodstuff. Inflation is expected to reach its peak in the autumn.