BUDAPEST (Reuters) - The National Bank of Hungary is expected to keep interest rates unchanged next Tuesday and stick to its dovish stance, ignoring the weak forint which hit a record low versus the euro earlier this week, a Reuters poll of analysts showed.
The majority of analysts in a Sept. 16-18 poll said the forint EURHUF=D2 was unlikely to weaken as far as 340 per euro this year from the all-time low of 334.35 reached earlier this week. Only two of 10 analysts said this might happen.
“We can’t rule it out of course, as the main driver is the external environment. However, with the recent softening tone in trade wars and expecting some positive developments in Brexit, it can bring some stability for the HUF,” said Peter Virovacz at ING Bank.
For next year, 10 analysts projected that the average forint exchange rate would be firmer than 335 to the euro, and only one said it would be weaker.
“There will be a lot of volatility, a lot of uncertainty, but the range for the forint will remain between 325-335 so the average will be below 335,” Virovacz said. He said his forecast was based on the assumption that “the US won’t reignite a full-blown trade war against China and Europe.”
The forint has underperformed its peers in Central Europe this year, weakening 3.5% on fears of a global trade war and other geopolitical factors and the Hungarian central bank’s loose policy stance.
Hungary’s base rate NBHI at 0.9% is the lowest in Central Europe and the central bank is expected to keep it there in 2020 as well, with global central banks easing and inflation under control.
(Graphic: CEE FX losses in 2019, here)
The central bank, for the time being, does not need to worry about the weak forint as imported inflation is decreasing, some analysts said. Hungary’s foreign currency debt has been sharply reduced, and a weaker forint might even help exporters.
All 14 analysts in the poll said the central bank would leave its base rate HUINT=ECI at 0.9% at its Sept. 24 meeting. All 13 economists who gave a forecast for the overnight deposit rate HUODPO=ECI said it would stay at minus 0.05%. The median forecast of analysts sees steady rates in 2020 as well.
The central bank has said its base rate would remain unchanged for the foreseeable future and any necessary adjustment of monetary conditions would be implemented through changes in the overnight deposit rate or tools designed to adjust market liquidity.
Core inflation, which hit the top of the central bank’s 2% to 4% target range in May, retreated to 3.7% by August while headline inflation slowed to 3.1%. The central bank targets 3 percent inflation with a 1 percent tolerance range either side.
It will release new inflation projections next Tuesday and analysts will be closely watching any comments on when, if at all, the bank sees the weak forint driving inflation higher.
The bank has repeatedly said it had no exchange rate target.
(Graphic: Central European rates vs the ECB, here)
The government is not concerned about the forint’s recent weakness. Gergely Gulyas, Prime Minister Viktor Orban’s chief of staff, told Reuters on Monday that the current exchange rate “posed no threat to the success of Hungarian economic policy.”
Gulyas said that with households’ foreign currency mortgages converted into forints, the exchange rate had no decisive impact on the budget and economy.
As a further reduction in forex exposure, the share of foreign currency debt within state debt declined to 18.4% at the end of July from 20% at the end of 2018, debt agency data showed.
This has been due to the government’s strategy of refinancing debt primarily from domestic forint issuance.
Hungary also 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 for the government for construction projects at a time when the economy is slowing.
The economy expanded 4.9% in the second quarter compared with the same quarter last year, but it is expected to decelerate as growth slows in Germany, its main trading partner.
Reporting by Krisztina Than; Additional reporting by Gergely Szakacs and Jason Hovet in Prague; Editing by Hugh Lawson