The forint jumped on a big sterilisation rate increase and government talk on concessions to the EU Commission

HUNGARY - In Brief 07 Jul 2022 by Istvan Racz

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The forint appreciated back to EURHUF 402-403 on Thursday from the previous day's historic low at 414-417. The authorities did two things to achieve this: 1. The MNB raised the 1-week deposit rate (the effective sterilisation rate) by 200bps to 9.75%, after expressly saying that recent HUF depreciation represented a threat to the Bank's counter-inflationary efforts; and2. Top-level government officials (PM Orbán and cabinet minister Gulyás) announced that the government made concessions to the EU Commission in four key areas the latter held crucial to reach agreement on Hungary's access to EU funds, from the rule-of-law mechanism's point of view. This is actually quite significant. As we wrote on Wednesday, the MNB needed to catch up with the pace of the deterioration of its inflation forecast, in terms of its sterilisation rate hikes, and the following rate increase appeared to meet that requirement for now. And for the other issue, the government apparently realised correctly that its access to EU funds, and progress at the talks on that subject, are widely held as a very central issue as regards the health of the BOP and the forint, and thus of domestic financial stabilisation in general. On the rule-of-law talks, the government claimed to have written in its late-June response to the EU Commission that: a. it is prepared to reduce the share of public procurement procedures with only one applicant to no more than 15%;b. it accepts the legal reform that courts can force the chief attorney to initiate prosecution should the latter refuse to do so in response to an initiative coming from EU's controlling agency;c. it undertakes to secure appropriate room for a social c...