August 29, 2018 / 11:25 AM / 3 months ago

Why Hungary's central bank can be relaxed about a weaker forint

BUDAPEST (Reuters) - The National Bank of Hungary has maintained its dovish monetary stance during the recent global market turmoil which has made the forint the worst performing currency in central Europe so far in 2018.

After hitting a record low of 330.70 to the euro in early July, the forint has settled in a range around 322-325, about 4 to 5 percent weaker than levels it traded in the first quarter.

This shift looks lasting. The Hungarian economy minister said last month the currency was looking for a new equilibrium level and “the period of calm that kept the forint in a 305 to 315 range is over.”

Relative performance of CEE currencies - reut.rs/2N0AAmj

The central bank so far appears to be comfortable with the weaker forint, as its slide has been gradual and has not been coupled with an outflow of foreign investors’ bond holdings .HUBONDHOLD.

The bank kept its loose policy stance at its July and August rate meetings NBHI.

In an emailed reply to Reuters questions the bank said on Wednesday it had no exchange rate target and would not comment on questions regarding the forint’s level.

Following is a summary of what analysts see as the factors easing pressure on the bank to change its loose policy:

1. A current account surplus has improved Hungary’s debt profile. The central bank projects that the current account will be in a 1.1 percent surplus of GDP in 2018, 0.8 percent next year and 1.3 percent in 2020.

Hungary's current account runs surplus - reut.rs/2MXRPVp

2. Hungary’s net external debt dropped to 13.3 percent of GDP in 2017, compared with 54.6 percent in 2010, based on debt agency data. The share of foreign currency debt within total gross debt was 20.7 percent at the end of June, down from about 40 percent in 2013. This has been due to the government’s strategy to refinance debt primarily from domestic forint issuance.

3. Hungary pushed through a conversion of households’ foreign currency mortgages into forints, which has reduced the fx debt exposure of Hungarian families to near zero.

4. A weaker forint is helping Hungarian companies that export to the eurozone and helps economic growth.

5. So far there has not been a significant pass-through into inflation from the weaker forint. Annual inflation picked up to 3.4 percent in July, but the NBH said this was largely due to a rise in fuel prices. Core CPI was flat at 2.4 percent.

The central bank targets 3 percent inflation with a 1 percent tolerance range either side.

6. The NBH’s deputy governor said in a study earlier this month that there was no exchange rate risk to speak of in the corporate sector.

He said Hungary’s open economy had significant foreign currency revenue from exports, which meant a natural hedge for the foreign currency debt of the sector. Small- and medium-sized companies have converted much of their fx loans into forint loans with the help of an NBH programme.

7. Due to the current account surplus there would be some upward pressure on the forint at a time when surging wages could erode relative competitiveness, so some nominal forint depreciation helps offset this.

8. Hungary receives billions of euros worth of development funds from the European Union each year, which, if converted at a weaker forint exchange rate, brings in more money. Big inflows are expected this year and next.

Reporting by Krisztina Than; Editing by David Holmes

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