Forint ended the week on the 'right' side of EURHUF 310

HUNGARY - In Brief 27 Feb 2016 by Istvan Racz

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In our previous post here at GSD on Monday, we predicted that the MNB was likely to make forceful verbal intervention already on the following day, with a view to weaken the forint back above EURHUF 310 from the EURHUF 307-308 levels it held for a few days at that time. Since then, verbal intervention has happened and the forint has retreated to EURHUF 311.25, where it in fact ended the week. This looks no big deal, of course, but at least the MNB has provided evidence that it indeed does not tolerate any forint appreciation from last year's average EURHUF 309.9, given the exchange rate is highly powerful in setting monetary conditions in Hungary, which is a very open economy, as we all know. Particularly not at a time when in January, fiscal policy was becoming tighter - the central government balance made a swing equivalent to 5% of GDP in the positive direction on annualized basis, due to an 8.1% yoy decrease of total expenditure -, the monthly government spending on EU projects fell to HUF27bn only, down from HUF124bn a year earlier, and employment fell slightly on seasonally adjusted basis, marking the first monthly decrease in the last three years. What we still do not know is exactly how far the MNB would like to weaken the currency, although we suspect from all signs (= MNB activity) that it does not want to be very aggressive, for it does not want to raise inflation through an 'excessively' weak HUF. So for the time being, it looks like the MNB prefers an EURHUF 310-315 exchange rate, and this may very well be the rule of thumb for the whole of 2016. Regarding consequences, it may seem that pushing the HUF back to the seemingly preferred range went too easily....