Once more on rate cuts, Mr. Varga ... and the strong forint

HUNGARY - In Brief 24 Jul 2020 by Istvan Racz
On July 21, the MNB reduced its base rate to 0.6%, and the forint has strengthened a lot against the euro since then.Later in the week, finance minister Varga announced that he sees the economy a lot weaker than before, and the forint continued to strengthen.Well, yes, the forint can strengthen on a wide variety of factors, ranging from improving global sentiment to the subtleties of the daily BOP cash flow or the development of contractual positions on the currency market. Yesterday, for example, the forint may have been boosted by the announcement of an EUR 4bn standby agreement on FX repos between the MNB and the ECB, an important part of a safety net that the MNB has built out to get FX liquidity quickly in case of an emergency situation.Fair enough, but we would still warn the reader that Mr. Varga's statement on the weak economy sounded as a genuine forint-negative event, and also that the current EURHUF 346-347 exchange rate is starting to resemble the levels that existed immediately before the previous rate cut in late June. At that time, the MNB had spectacularly no problem with the forint depreciating to around 355 quickly, basically because that later level is perfectly fine from the point of view of its existing preference regarding inflation. Consequently 345 may appear a bit too strong.Of course, the Bank said the other day that it would not reduce the base rate any further from the current 0.6%. But it has not said that it would insist on the current interest rate corridor, or that it would never detach the effective sterilisation rate or the interest charged for its collateralised loans extended to banks from the base rate. Neither has it said that the ...

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