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The forint has continued to strengthen in the second quarter of 2023. In the first half of the year the Hungarian currency was only outperformed by the Mexican peso. The reason is still the extremely high interest rate, despite the implemented policy rate cut –reported portfolio.hu.

After last year’s historic low, the year 2023 is clearly about the strengthening of the forint, as

the Hungarian currency has appreciated by almost seven percent against the euro and 8.3 percent against the dollar since the beginning of the year.

This also required the National Bank of Hungary (MNB) to decide on an extraordinary 500 basis point interest rate rise in mid-October. In May, the central bank started to cut the policy rate, but this does not seem to have curbed the strength of the Hungarian currency.

The central building of the National Bank of Hungary. Photo: Wikipedia.org

The forint has also performed well in the region, with the Polish zloty strengthening 5.4 percent against the euro since the start of the year, and the Czech koruna by 1.65 percent.

The high interest rate level is particularly advantageous for so-called carry trade transactions, where investors can earn on the significant interest rate differential even if the exchange rate does not move significantly. On the other hand, the Hungarian interest rate level has discouraged investors speculating against the forint, as they have lost one and a half percent per month on the interest rate differential, which should have been compensated by the weakening of the Hungarian currency.

Of course, the high interest rate is not everything:

the favorable international sentiment, the weakening of the dollar, and the fall in world natural gas prices over the past six months have contributed to the significant strengthening of the forint.

The former has supported investor sentiment towards emerging markets, while the latter has significantly improved the external position of the Hungarian economy, because it relies on energy imports.

Looking at exchange rate movements over the last three months, the forint’s performance has been less pronounced, with the Hungarian currency at the top of the mid-range, with the euro at the bottom of the range a week ago.

In recent weeks, there have been signs that the forint cannot strengthen indefinitely, with the process stalling around the 370 level and the forint squeezed into a narrow band. In addition to technical factors,

the MNB’s interest rate cuts may also have played a role in this, with the benchmark rate having been cut by 100-100 basis points in the last two meetings, and now standing at 16%.

However, this is still extremely high, as interest rates in the region are around seven percent, for example in Poland and the Czech Republic.

Of course, there are still risks for the forint,

the most important of which has long been the fate of EU funds,

possibly posing a major headache in the second half of the year. If no agreement can be reached, investors may sooner or later focus on this issue again, and that could mean the end of the forint’s rise, in parallel with a further cut in interest rates.

Hungarian Forint Strengthens after Central Bank Base Rate Hike
Hungarian Forint Strengthens after Central Bank Base Rate Hike

Minutes after the announcement, the forint strengthened by 0.5-0.6 percent to 410.30 forints from 412.25 versus the euro.Continue reading

Featured image: Pixabay.com

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