Hungarian Currency Strengthening

The Hungarian currency, the forint continued to strengthen on Tuesday, with the euro falling below HUF 350 on international currency markets. However, this position is still about 33% weaker than in the spring of 2010 when the Orbán government took power.

The strengthening continued after the statement by Barnabás Virág, Vice Governor of the National Bank of Hungary (MNB), on Monday that the central bank is considering an interest rate hike due to inflationary pressures.

The vice-president said monetary policy will enter a new phase from June as the economy reopens. Growth this year could be close to 6 percent and the central bank could adjust short rates in a data-driven but proactive manner in several steps to address rising inflation risks and second-round effects, Barnabás Virág said.

He reiterated that the MNB uses the base rate to respond to persistent inflation risks, while the one-week deposit rate is used to address risk-price shocks. Virág said that the June inflation report would be critical and that a base rate hike could be implemented as early as then. Crisis management tools will be phased out, but the bond purchase program will remain in place to keep long-term rates low.

After the announcement, the domestic currency strengthened rapidly by around one percent and dipped below the 352 forint/euro level, a five-month high, while the Polish zloty and the Czech koruna were little changed, OTP Bank said in an analysis. Interest rate hike expectations have strengthened, with the market pricing in hikes of 20-25 basis points by July, 60-75 by December this year and 125-150 basis points by 2022, napi.hu reports.