Since April 2019, the Hungarian forint has fallen sharply after core inflation accelerated steadily. The Hungarian central bank hiked its depo rate initially, and later had to hike this rate again, along with its lending rate. Until pressure began mounting on the exchange rate, MNB was uncertain regarding beginning a tightening cycle, and as soon as the euro area manufacturing cycle turned down, was quick to re-activate and expand its QE program of forint swaps.
However, easy monetary policy is expected now and will not necessarily ease the forint, noted Commerzbank in a research report. However, long after the virus crisis is over, the market might remember that MNB is inherently the most dovish CB in peer group. In the medium-term, the forint is thus likely to underperform its peers, said Commerzbank.
There are two other reasons of fear currently. Firstly, the fall in export cash-flow through the remainder of the first half of 2020 might likely be severe for every CEE nation. The might put strain on external debt financing. Hungary’s gross external debt is still close to 100 percent of GDP. This is quite lower than the 160 percent level of 2011, but is still way higher than Poland’s 63 percent. Secondly, Hungary’s asset valuations have always been sensitive to financial stress in Italy because of banking sector inter-linkages. Spillover impact from Italy has been re-activated now.
These sources of risk were seen in sharp rises in risk premia and bond yields. The forint has also eased. These developments set off the slightly contradictory monetary policy by MNB, where average interest rates had to be risen to defend the currency, but the central bank is simultaneously easing policy by carrying out yield-capping QE purchases of longer-end of government bonds.
“All said, once risk aversion calms down, we expect that the forint will stage a modest recovery (see table”, added Commerzbank.
