Hungary’s forint broke multi-month records against the euro in recent days, fueled by rate hike expectations and a promising economic growth outlook. The currency gained ground even as a steadying US dollar cut international risk appetite.
As inflation in Hungary and other central European nations is above central banks’ target levels, investors are betting on rising interest rates in the region. Against this backdrop, the Hungarian forint firmed to 346 against the euro earlier this week, its strongest level in ten months. The currency was trading at 360 to the euro a month earlier.
Rate hike expectations
Hungary’s central bank said in mid-May that it was ready to tighten monetary conditions “in a proactive manner to the extent necessary in order to ensure price stability and to mitigate inflation risks.” Central Bank Vice President Barnabás Virág stressed that interest rate hikes were on the agenda in order to reduce inflation, which exceeds the bank’s target. The remarks lent significant support to the Hungarian currency.
Hungarian inflation jumped 5.1% in April, the highest rate of acceleration in the EU, surpassing the 5% peak the central bank had earlier projected. Even though inflation is forecast to slow in the summer, the central bank sees price pressures on the horizon, according to Virág. Rate hikes could start in June, according to recent signals from policymakers and market pricing. “Although short positions against the forint have drastically been cut back recently, there is little chance for further significant firming in the short term. The further direction for the currency could be decided by the June rate meeting," analysts at CIB Bank in Budapest wrote in a research note.
Strong GDP growth seen
Hungary’s stronger-than-expected economic growth also helped the forint gain ground against the euro. In the first quarter, Hungary’s GDP grew by 2% compared to the last three months of 2020. The figure was revised up from 1.9% in the first reading. The upward revision in the second reading was unexpected and showed that the Hungarian economy was still catching up with its peers. GDP may grow by as much as 6 percent this year, Dávid Németh, analyst at K&H Bank in Budapest said.
ING Bank expects the country’s economy to expand by an annual 7.4% this year, which would be Hungary’s fastest recorded economic growth under the current methodology. The second reading of the first-quarter GDP “added to the surprise” caused by recent trends, showing that consumption hardly slowed in the first quarter despite stringent pandemic-related measures, ING Bank noted. In addition, the service sector expanded by 2.2%, driven by shipment, storage, information, communication, and professional scientific activity. While output overall slowed further, exports of goods and services expanded, he said. Production grew in almost all sectors too, with industrial and construction output both exceeding expectations.
The OECD sees the Hungarian economy expanding by 4.6% this year, according to the organization’s recently released biannual forecast. “Economic activity is expected to rebound from mid-2021 onwards as a swift vaccination rollout supports the recovery of private consumption. External demand will strengthen with the recovery of major European trading partners,” the OECD said, adding that the country’s economy will likely grow by 5% in 2022.
The European Commission’s spring economic forecast projects Hungary’s GDP will climb 5% this year. Earlier, the EC expected growth of 4.0% for 2021. “Household consumption is poised to rebound thanks to steady real income growth, and the increasing ability and willingness, of consumers to spend once restrictions are lifted,” the EC said, adding that Hungary’s economy is expected to expand by 5.5% in 2022.
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