Hungarian forint flounders even as central bank ramps up rates

By Krisztina Than and Anita Komuves

BUDAPEST (Reuters) -Hungary’s central bank raised its one-week deposit rate by a whopping 200 bps to 9.75% on Thursday and the government pledged to rein in the budget deficit in a bid to shore up the forint after it plunged to record lows this week.

Reviving the currency is a major challenge for Prime Minister Viktor Orban’s government as Hungary’s twin deficits and lack of access to EU funds prompt investors to sell the forint amid worsening sentiment on international markets.

Fears of a Europe-wide recession and the prospect of a deepening energy crisis have weakened the euro versus the dollar and contributed to the forint’s falls.

“There are so many risks around right now that quite simply, it is not worth holding onto forint assets,” said Peter Virovacz, an analyst at ING.

He said Hungary’s current account deficit, coupled with a lack of agreement on the release of frozen EU funds highlighted the country’s worsening risk profile. This has led to a decoupling of the forint from its peers in Central Europe – with the forint depreciating more than 10% this year, while the Polish zloty eased just over 4%.

In an effort to talk up the forint, Orban’s chief of staff told a briefing the government was committed to reaching its budget deficit targets this year and next, and aims to close talks with the European Commission about the release of EU funds as soon as possible.

Gergely Gulyas said talks have progressed as Hungary made concessions on four issues but a deal would likely come only in the autumn.

“What we can do is we stick to our planned budget deficit target,” he said when asked about the forint’s plunge, adding that Hungary — which is predominantly reliant on Russian gas — would also strive to diversify its energy imports.

LIMITED TOOLS

The forint has been on a weakening trajectory for weeks, complicating the central bank’s efforts to curb double-digit inflation and exposing Hungarian assets to any negative shift in sentiment caused by the war in neighbouring Ukraine and surging energy costs.

Hungary’s current account deficit is expected to widen to 5.6%-6.6% of GDP this year, compared with 2.2%/GDP in the Czech Republic and a deficit of 1.5% of GDP in Poland. Hungary’s public debt level is around 77% – far higher than 42% of GDP in the Czech economy and about 56% in Poland.

On Friday, Hungary will publish June inflation figures that are expected to show a rise in annual inflation to 11.5% despite government-imposed price caps on fuels, energy bills and basic foodstuffs. The central bank expects inflation to peak in the autumn, but a weakening forint poses additional inflation risks via imported inflation.

Although the economy is still propelled by strong domestic demand, rising inflation and borrowing costs are expected to lead to a slowdown next year.

On Wednesday the NBH said the financial market situation increased inflation risks and it would use “all its tools” to intervene to ensure price stability.

But analysts say the bank’s tools had limited potential to boost the forint and a deal with the EU would be key.

“From this point onwards, rate hikes are pointless … we need to sign a deal with the EU and we need the war to end at last,” said Gergely Suppan, an analyst at Magyar Bankholding in Budapest. “This is not in the hands of the central bank.”

The forint firmed to 407.80 immediately after the fresh rate hike, but the gains faded and at 1044 GMT the currency was trading at around 410.75, firming slightly on Gulyas’ comments.

Hungarian bond yields have also jumped this week, with the 10-year yield at around 8.6% but traders and analysts said investors held onto forint-denominated government bonds.

A Reuters poll showed on Wednesday that the forint could gradually recover and add more than 7% in the next year, if EU funds start flowing in and inflation slows, and external risks subside.

(Reporting by Krisztina Than and Anita Komuves; Editing by Toby Chopra, Barbara Lewis and Carmel Crimmins)