October 10, 2016 / 1:41 PM / 3 years ago

Hungarian central bank running out of tools to rein in surging forint

BUDAPEST (Reuters) - The forint has surged to 17-month highs boosted by the Hungarian economy’s improving risk profile, testing the ability of the country’s central bank to rein in the currency and protect growth.

A picture illustration shows a woman holding Hungarian forints notes in Budapest July 24, 2013. REUTERS/Laszlo Balogh

The strengthening forint is becoming a risk to Hungary’s export-orientated economy and the National Bank of Hungary, which has already cut its main rate NBHI to a record low 0.9 percent, has only a limited range of policy tools left to keep a lid on further rises, analysts said.

The forint, Hungarian government bonds and Budapest’s stock market — which has surged 19 percent this year — have outperformed Central European peers.

They have been buoyed by Hungary’s upgrade to investment status by two rating agencies after years in “junk”, a big current account surplus and declining debt levels.

The forint EURHUF=D3 surged to 17-month highs of 304 to the euro on Monday.

“The market is in the greed phase now ... and is testing whether the central bank steps in,” said Monika Kiss, an analyst at brokerage Equilor.

Peter Virovacz, an analyst at ING in Budapest, said only external factors — a rate hike by the Federal Reserve, or tensions around Brexit and the U.S. elections — could stem the forint’s gains.

“I think (the bank is running out of tools) ... they cannot do much against this (forint) trend,” he added.

“Orbanomics” - Prime Minister Viktor Orban’s controversial form of economic shock therapy launched in 2010 - is paying off, even if some doubt a growth rate of about 3 percent can be maintained in the medium term. Investment fell 20 percent in the second quarter on ebbing EU funds.

However, Hungary is being compared more favourably to Poland, the region’s strongest economy, due to persistent political concerns in Poland over the rule of law.

A Reuters poll showed that forint-denominated bonds could significantly outperform peers in Poland over the next year. Moody’s may also upgrade Hungary early next month, while Poland faces downgrade risks.

This could all boost the forint EURHUF= further in the short term, which could make the central bank uncomfortable as it could harm growth and cut the bank’s substantial profits on its foreign currency reserves.

“Although HUF remains fundamentally undervalued, prevailing low market levels in EUR/HUF ... impinges on all observable goals of the central bank, namely growth (via net exports), profitability, and inflation targeting,” Societe Generale analysts said in a note.

The National Bank of Hungary said in a reply to Reuters questions that its primary goal was to achieve and maintain price stability and it had no exchange rate or profit target.


The bank, run by a strong ally of Prime Minister Viktor Orban, has aggressively eased policy with rate cuts and a funding-for-lending program since 2013, in order to boost the economy, in line with the government’s goal.

From now on, instead of cutting its base rate further, it said it would ease monetary conditions by boosting liquidity in local money markets, driving interbank rates and borrowing costs lower. It will do this by squeezing funds parked by commercial banks out of its 3-month deposit facility.

“The bank still has some ammunition, but this is limited,” said Gergely Forian-Szabo, fund manager of Pioneer Investments in Budapest.  

Szabo-Forian said the bank could shift the interest rate corridor lower, cutting its overnight deposit rate further into negative territory from -0.05 percent.

Alternatively, it could impose a further cap on its 3-month deposits or could intervene in the spot market by buying euros to curb the forint, as the Czech central bank has done to weaken the crown.

The Hungarian central bank never comments on its market activity, but its vice governor said earlier this year that the bank would not apply an exchange rate cap.

On Friday the NBH announced that it had new fine-tuning tools ready to manage liquidity in the local interbank market.

When needed, the bank will use forint swaps for the first time to inject forints into the market, and established a one-week deposit facility, to be activated when there is an excess of forints.

By pumping liquidity via forint swaps the central bank could reduce the carry on the forint, making it less attractive for investors to buy it.

Eszter Gargyan, an analyst at Citibank said the bank could deploy the new forint swaps, providing forint liquidity, or impose a more aggressive limit on three-month deposits from November or from January.

“I think they will cut the base rate only if the forint strengthens in the longer term, and this could be on the agenda, — depending on how inflation shapes up — at the beginning of 2017 the earliest,” Gargyan added.

ING’s Virovacz said the bank was unlikely to cut the base rate further, fearing that it would have to hike later if global winds change. That would not look good politically ahead of 2018 elections.

“The other option is that they introduce a Czech-style fx floor and intervene buying euros... but this would boost the bank’s balance sheet which the bank does not want. So with the two most effective tools out, it has very limited options.”

Reporting by Krisztina Than; Editing by Toby Chopra

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