Hungary’s central bank widens rate corridor to stem forint decline

  • Raises the top of the rate corridor by 100 basis points
  • The forint initially strengthens, then retreats
  • Currency still down 5% over the year
  • Bank may continue with rate hikes on Thursday – analyst

BUDAPEST, March 8 (Reuters) – The National Bank of Hungary (NBH) raised the top of its interest rate corridor by 100 basis points on Tuesday to create room for further policy tightening amid massive sale caused by the war in neighboring Ukraine.

The bank raised its secured lending rate by 100 basis points to 6.4%, but left other interest rates unchanged and said it did not plan to change the base rate (HUINT=ECI ).

The move, which some analysts had flagged after the BNH exhausted its room to maneuver with its biggest interest rate hike since late 2008 last week, initially boosted the forint . The unit had fallen to record lows near 400 to the euro on Monday.

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However, at 2:19 p.m. GMT the currency, which is still down 5% for the year, fell back to 388.85 per euro, weaker than 387.1 just before the announcement but 1.4% stronger. on the day.

The NBH said Tuesday’s decision created leeway to respond to market volatility with its much-needed one-week deposit facility.

“If necessary, the Bank stands ready to continue to respond quickly and flexibly to commodity and financial market risks arising from the rapidly changing environment by setting the deposit rate at one week,” said she said in a statement.

Deputy Governor Barnabas Virag told an online briefing that inflation, which hit a nearly 15-year high in January, likely rose further to 8-8.5% in February, pressures inflationary rising amid war in Ukraine.

However, he said the risks to economic growth were on the downside. The bank will reflect these changes in its quarterly inflation report to be released later this month, he said.

Hungary will release February inflation data on Wednesday. Economists polled by Reuters see inflation rising to 8.1%.

Virag said foreign investors’ bets against the forint had increased significantly in recent weeks, but the BNH would continue its rate-tightening campaign, making transactions against the forint more expensive.

“Holding positions against the forint will be painful,” Virag said, expressing hope that the deals, worth some 600 billion forints ($1.68 billion) over the past two weeks, would be unraveled. once the crisis in Ukraine has subsided.

Erste Group analysts said the move would allow the bank to raise its one-week deposit rate, which it uses to combat short-term market volatility, in the next bank tender. ease scheduled for Thursday.

“We expect further tightening action to be taken in the near future as the (NBH) will likely raise the one-week deposit rate further…on Thursday by a further 75 basis points to 6.1%,” he said. said Erste economist Orsolya Nyeste in a note.

Government debt agency AKK, which temporarily suspended mandatory market making for primary dealers amid Monday’s selloff, decided to go ahead with a bond tender scheduled for Thursday but cut back drastically. amounts offered.

Both the Polish and Czech central banks intervened in the market last week to support their falling currencies. The Hungarian central bank did not comment on the market interventions.

($1 = 356.21 forints)

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Reporting by Gergely Szakacs and Anita Komuves Editing by Bernadette Baum

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