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Hungarian Forint: 1-3 Month Outlook

Hungary's inflation is rising, but it is still well below the inflation target of 3.00%. The country posted inflation at 0.6% y/y in June as expected by consensus. 

NBH announced the easing cycle is over after cutting its key rate to 1.35% on July 21. But there is room for further NBH easing to end the cycle at 1.25% as inflation is low and monetary policy divergence between NBH and ECB may trigger forint strength, says RBC Capital Markets.

"Monetary policy divergence between NBH and ECB will likely push EUR/HUF lower. NBH recently announced the easing cycle has ended, while ECB is still easing and is planning to continue until September 2016. This divergence expected to keeps interest rate differentials quite wide between Hungary and EU's bond markets. This may attract investors to Hungary, causing HUF appreciation against the EUR. We believe NBH may not want the forint below 300 against the EUR", according to RBC Capital Economics.

This may add deflationary pressures. About 52% of Hungary's exports go to the Euro area. It is not in Hungary's favor if HUF strengthens significantly against the EUR. As of March, goods and services exports stood at 92.7% of GDP. In May, exports y/y came in at 2.3% against 8.8% and 12.9% the two previous months. A combination of these factors may push NBH to end the cycle at 1.25% as EUR/HUF below 300, adds RBC Capital Markets. 

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