Hungarian Forint Plummets Amid Growing Risks

The Hungarian forint has dropped to its lowest level in 18 months, driven by escalating tensions in the Middle East and recent rate cuts by the National Bank of Hungary (NBH), prompting investors to pull back. Despite these challenges, the central bank has reassured markets that it will maintain a "disciplined and tight" monetary policy to ease investor concerns.

The forint fell for six consecutive days against the euro this week, hitting its weakest point since March 2023. Investors' appetite for riskier assets has decreased, particularly following Israel's vow to retaliate against missile attacks by Iran.

Hungary’s currency has underperformed compared to its Central European counterparts, as concerns grow over the country's budgetary policies ahead of the 2026 general elections. Prime Minister Viktor Orbán’s government is pressuring the central bank to do more to reignite a sluggish economic recovery.

With the NBH recently cutting its base interest rate to 6.5%, the central bank faces a difficult balancing act. Further rate cuts could weaken the forint even more, limiting their options. As the currency continues to slide, the NBH must be cautious to avoid deepening the depreciation.

Economists note that the forint shows the highest sensitivity to global risks compared to other Central and Eastern European currencies. Given the ongoing geopolitical tensions, the forint may face continued pressure in the coming months. However, local economic fundamentals supporting the currency remain strong, and Hungary’s interest rate spread compared to core markets has widened to its highest point since June, potentially driving forint appreciation later.

Analysts at ING Bank in Budapest suggest that the 392-400 EUR/HUF range will likely dominate the market until the end of the year, but worsening geopolitical conditions could push the forint beyond the 400 mark. In response, a weaker forint might prompt the NBH to adopt a more hawkish stance, providing some support against further declines.

In an attempt to boost green initiatives, the NBH this week unveiled new programs set to launch in January. These include easing rules on green loans for households and offering green bonds for companies. However, the central bank clarified that these measures would not influence its broader monetary policy. The green program will be "limited and targeted," focusing on environmental sustainability, and overall interbank liquidity is expected to tighten next year as Covid-era collateral repurchase agreements expire.