MNB raised its key one-week deposit rate by 200 basis points
2022.07.07 16:41
The forint strengthened on Thursday, after a massive emergency interest rate hike from the National Bank of Hungary (MNB) earlier in the day to shore up the faltering currency.
The MNB raised its key one-week deposit rate by 200 basis points to 9.75%, the highest in a decade, aiming to stop a weakening currency compounding an increasingly acute inflation problem. Core consumer prices rose over 12% in the year through May, while food prices were up 20% from a year earlier.
The forint had fallen over 5% in less a week against the euro – a currency with enough problems of its own – as Budapest’s long-simmering dispute over the rule of law came to the boil again, tensions inflamed by the resistance of Prime Minister Viktor Orban to the bloc’s attempts to punish Russia for its invasion of Ukraine.
An analysis commissioned by members of the European Parliament and published on Wednesday had recommended freezing all EU payments to Budapest, after years of a drift toward authoritarianism under Orban. The money is badly needed to fund Hungary’s recovery from the pandemic, and to help it deal with the energy crisis currently engulfing almost all of Europe. The government’s 10-year borrowing costs have more than doubled from 4% to 8.78% in the last eight months.
The forint had started to recover already late on Wednesday, after the MNB flagged Thursday’s emergency meeting. By 09:25 AM ET (1325 GMT), it was at 404.59 to the euro, up 1.0% on the day and on course for its first winning day in six.
The MNB had made a similarly aggressive move with its base rate last week, but Thursday’s move carries more weight because the bulk of bank refinancing in Hungary is tied to the one-week rate instead. It also goes further than analysts had expected. As recently as the start of this week, JPMorgan analysts were predicting that Hungarian key rates would peak at just 9.5% in the current quarter. They’re now above that level, with the central bank still vowing to do more if needed to restore price stability.
