No inflation surprise, yet the forint is weakening further today

HUNGARY - In Brief 11 Oct 2022 by Istvan Racz

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September CPI-inflation was reported at 20.1% yoy this morning. This was sharply up from 15.6% yoy in August, but with a well-explained good reason, the most recent energy price reform, and almost exactly matching the MNB's forecast and analysts' median expectation. Yet the forint has got even weaker at EURHUF 428, a new record low. Global pessimism, Europe's troubles are partial explanation, but the forint is also a regional under-performer once again. As regards domestic factors, fiscal adjustment is proceeding well, and the government is even tightening further, by up to the equivalent of 0.5% of annual GDP during the rest of this year, through additional cuts of spending on government services, as announced by finance minister Varga today. They have also made good progress in carrying out the legal and institutional reform steps required to restore access to EU funds: parliament has already passed a batch of related amendments including the setting up of a new Integrity Authority, a key point on the list of commitments made to the EU Commission. So where we see the big problem is the question marks around MNB policy. Announcing with great fanfare that no further interest rate hikes would be undertaken when inflation was about to make its biggest jump has led to the loss of the most important, and actually the only one, benchmark for MNB policy in public perception: the speculative belief that the MNB was protecting EURHUF 400 in short term. Now that this belief has gone, it is pretty much unclear what the Bank might do, if at all, to maintain the stability of the forint, by far the most important element of its transmission mechanism. Currency market interventions ...