Forint moves gain importance in Hungary rate decisions, central bank chief economist says

The next policy meeting is due on Tuesday, when the central bank has said it would likely slow the pace of rate easing further after cuts totalling 975 bps since last May, taking back emergency hikes launched in 2022 to shore up the forint. "In October 2022 the country got into a very severe situation and most of our exchange rate crisis indicators sent a signal," Kuti was quoted saying.

Hungary's central bank said on Wednesday the forint's moves have become an even more important factor in price developments than before, striking a cautious tone ahead of next week's policy meeting amid fresh falls in the volatile currency. "The forint's exchange rate is an important factor for the NBH (National Bank of Hungary) and its role has increased in the recent past," the central bank's chief economist Zsolt Kuti, told financial news website portfolio.hu in an interview.

Kuti's comments mark a clear departure from the central bank's earlier strategy of avoiding explicit comments on the forint, which traded at 394.45 per euro at 0730 GMT, 0.25% stronger on the day. The central bank cut its base rate by 75 basis points (bps) to 8.25% last month as expected, slowing the pace of rate cuts after the forint fell to a one-year low, in part due to a standoff between the bank and Prime Minister Viktor Orban's government.

While the tensions have eased in the past few weeks, the forint, which sank to record lows versus the euro in late 2022, is still down nearly 3% against the euro this year, making it the worst performer in central Europe. The next policy meeting is due on Tuesday, when the central bank has said it would likely slow the pace of rate easing further after cuts totalling 975 bps since last May, taking back emergency hikes launched in 2022 to shore up the forint.

"In October 2022 the country got into a very severe situation and most of our exchange rate crisis indicators sent a signal," Kuti was quoted saying. He said the forint's moves were important as they also affected household saving strategies and corporate behaviour as well as feeding into the risk assessment of the country, which has ramped up foreign currency borrowing in the past years.

"For years, it was true that a one-percent fall in the forint boosts inflation by 0.1-0.15 percentage point. Now this has more than doubled and the larger repricing has also become faster," Kuti said. Market services inflation is still in double digits and the bank expects it to remain high in the short term, he said, making the exchange rate an even more important factor in importing lower inflation from abroad.

Kuti also said some market expectations for Hungary's base rate to fall to 4% by the end of the year were overdone, reiterating the bank's previous guidance for a 6.5% to 7% base rate level by the end of the first half.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)