Hungary central bank running out of tools to rein in surging forint

The forint has surged to 17-month highs boosted by the Hungarian economy’s improving risk profile, testing the ability of the country’s central bank to rein in the currency and protect growth.
The strengthening forint is becoming a risk to Hungary’s export-orientated economy and the National Bank of Hungary, which has already cut its main rate to a record low 0.9%, has only a limited range of policy tools left to keep a lid on further rises, analysts said.
The forint, Hungarian government bonds and Budapest’s stock market — which has surged 19% this year — have outperformed Central European peers.
They have been buoyed by Hungary’s upgrade to investment status by two rating agencies after years in “junk”, a big current account surplus and declining debt levels.
The forint surged to 17-month highs of 304 to the euro yesterday.
“The market is in the greed phase now...and is testing whether the central bank steps in,” said Monika Kiss, an analyst at brokerage Equilor.
Peter Virovacz, an analyst at ING in Budapest, said only external factors — a rate hike by the Federal Reserve, or tensions around Brexit and the US elections — could stem the forint’s gains.
“I think (the bank is running out of tools)...they cannot do much against this (forint) trend,” he added.
“Orbanomics” — Prime Minister Viktor Orban’s controversial form of economic shock therapy launched in 2010 — is paying off, even if some doubt a growth rate of about 3% can be maintained in the medium term.
Investment fell 20% in the second quarter on ebbing EU funds. However, Hungary is being compared more favourably to Poland, the region’s strongest economy, due to persistent political concerns in Poland over the rule of law.
A Reuters poll showed that forint-denominated bonds could significantly outperform peers in Poland over the next year. Moody’s may also upgrade Hungary early next month, while Poland faces downgrade risks. This could all boost the forint further in the short term, which could make the central bank uncomfortable as it could harm growth and cut the bank’s substantial profits on its foreign currency reserves.
“Although HUF remains fundamentally undervalued, prevailing low market levels in EUR/HUF...impinges on all observable goals of the central bank, namely growth (via net exports), profitability, and inflation targeting,” Societe Generale analysts said in a note.
The National Bank of Hungary said in a reply to Reuters questions that its primary goal was to achieve and maintain price stability and it had no exchange rate or profit target.
The bank, run by a strong ally of Prime Minister Viktor Orban, has aggressively eased policy with rate cuts and a funding-for-lending program since 2013, in order to boost the economy, in line with the government’s goal.
From now on, instead of cutting its base rate further, it said it would ease monetary conditions by boosting liquidity in local money markets, driving interbank rates and borrowing costs lower.
It will do this by squeezing funds parked by commercial banks out of its 3-month deposit facility.
“The bank still has some ammunition, but this is limited,” said Gergely Forian-Szabo, fund manager of Pioneer Investments in Budapest.