Hungary raises key interest rate by 200 basis points as forint tumbles

Hungary’s central bank raised one of its main interest rates by 200 basis points to 9.75 per cent on Thursday morning in an effort to stop the freefall of the forint.

The move — which leaves the one-week deposit rate, a short-term tool used to control market volatility, at its highest level in more than a decade — follows a 5 per cent fall in the currency against the euro over the past week amid a political tussle with Brussels.

Inflation and a yawning current account deficit are being compounded by spats between Budapest and the European Commission, raising alarm among market participants. Government borrowing costs have risen sharply in recent days, with the 10-year benchmark bond yield reaching 8.7 per cent over fears that Hungary will struggle to reach a deal with Brussels over the release of funds to aid its pandemic recovery.

The forint, which strengthened on Wednesday night when the central bank flagged the move, remained volatile on Thursday morning, with wide swings in both directions.

“Today’s market reaction displays very well that the central bank does not have the solution to this conundrum; the government does,” said Peter Virovacz, an economist at ING Bank. “The market is now waiting for the EU to say they approve of the Hungarian concessions, and are ready to make a deal quickly.”

Budapest has been at odds with the commission over its rule of law record and Brussels has held back pandemic recovery grants and loans worth more than €15bn. The commission has also launched a rule of law procedure that could block further billions in regular funding.

Premier Viktor Orbán’s government has struck a somewhat softer tone on the disputes with the EU in recent weeks. His chief of staff, Gergely Gulyás, told a press briefing on Thursday that the government was in “advanced” talks with the commission on the release of the funds, and that Budapest was willing to adhere to the commission’s demands in several areas.

“We want to close the discussions with the European Commission as soon as possible,” said Gulyás.

The central bank has said it will continue to raise rates as long as inflation was on the rise. Tax-adjusted core inflation, the bank’s preferred measure of lasting price trends, could reach an annual 13 to 14 per cent this year, it said in its latest inflation report.

Any rise in the one-week depo rate is likely to feed into the central bank’s base rate, which is now at 7.75 per cent after a 185 basis point jump last month. The next decision is on June 12.

Inflation stands at an annual rate of 10.7 per cent, the highest level in more than two decades. “The central bank remains ready to use all its tools to intervene in order to ensure price stability,” National Bank of Hungary deputy governor Barnabás Virág said on Wednesday.

The central European country’s currency has underperformed its regional peers. It has shed more than 10 per cent against the euro this year while the Polish zloty slid 4 per cent and the Czech koruna even gained against the single currency.