The Hungarian forint is teetering even as the central bank hikes interest rates

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

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  • Cbank raises 1-week deposit rate by 200 basis points to 9.75%
  • The Hungarian forint lost its negative risk sentiment
  • Widening C/A deficit, lack of access to EU funds weigh

BUDAPEST, July 7 (Reuters) – Hungary’s central bank hiked its one-week deposit rate by a whopping 200 basis points to 9.75% on Thursday in a mostly futile attempt so far to shore up the Hungarian forint after it fell to record lows this week .

Revitalizing the currency is a major challenge for Prime Minister Viktor Orban’s government as Hungary’s twin deficits and lack of access to EU funds prompt investors to sell the forint amid deteriorating international market sentiment.

Fears of a Europe-wide recession and the prospect of a deepening energy crisis have also weakened the euro against the dollar.

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“There are so many risks right now that it’s just not worth holding forint assets,” said Peter Virovacz, an analyst at ING.

He said Hungary’s current account deficit combined with a lack of an agreement on the release of frozen EU funds has highlighted the country’s deteriorating risk profile. This has caused the forint to decouple from its peers in central Europe – with the forint depreciating by more than 10% this year, while the Polish zloty fell by just over 4%.

Hungary’s current account deficit is expected to widen to between 5.6% and 6.6% of GDP this year, compared to 2.2%/GDP in the Czech Republic and a deficit of 1.5% of GDP in Poland. Hungary’s public debt is around 77% – well over 42% of the GDP of the Czech economy and about 56% of Poland’s.

The forint has been weaker for weeks, complicating the central bank’s efforts to rein in double-digit inflation and exposing Hungarian assets to a negative sentiment shift brought on by the war in neighboring Ukraine and rising energy costs.

Hungary is due to release June inflation figures on Friday, which forecast annual inflation to rise to 11.5% despite government-imposed price caps on fuel, energy bills and basic necessities. The central bank expects inflation to peak in the autumn, but a weakening forint poses additional inflationary risks from imported inflation.

Although the economy continues to be driven by strong domestic demand, rising inflation and borrowing costs are likely to result in a slowdown next year.

LIMITED TOOLS

On Wednesday, the NBH said the financial market situation was raising inflation risks and it would use “all its tools” to intervene to ensure price stability.

However, analysts say its tools have limited effectiveness.

“From this point on, raising interest rates is pointless… we have to sign a deal with the EU and the war has to end,” said Gergely Suppan, an analyst at Magyar Bankholding in Budapest. “That’s not in the hands of the central bank.”

The forint firmed to 407.80 immediately after the fresh rate hike, but gains quickly faded and at 09:01 GMT the currency was trading around 412.80, drifting towards its all-time low of 416.90.

Yields on Hungarian bonds also jumped this week, with the 10-year yield at around 8.6%, but traders and analysts said investors were sticking with forint-denominated government bonds.

“The market rates our bonds as ‘Hold’ or ‘Overweight’ because basically everyone believes… debt is cheap now when there’s an overall improvement,” Virovacz said.

“That’s why I don’t see any problems with external financing.”

A Reuters poll on Wednesday showed the forint could gradually recover and rise more than 7% next year if EU funds flow in and inflation eases and external risks ease. Continue reading

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Reporting by Krisztina Than and Anita Komuves; Adaptation by Toby Chopra and Barbara Lewis

Our standards: The Thomson Reuters Trust Policy.

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