Forint Drops 1st Month in Four on Rate Cut Cycle: Budapest Mover

The forint had its first monthly loss in four after Hungary’s central bank said it would continue cutting interest rates and as the economy minister met lenders to discuss plans to phase out foreign-currency mortgages.

The currency weakened 0.3 percent to 300.07 per euro by 5:58 p.m. in Budapest, depreciating for a seventh day and bringing the decline in July to 1.7 percent. It breached the 300 per euro level for the first time since April 26 on a closing basis. The Magyar Nemzeti Bank cut its main rate for a 12th consecutive month on July 23 to a record 4 percent.

“The MNB has already cut rates substantially and there is no experience with how the forint would react amid a negative market sentiment with such a low interest rate,” Robert Csajbok, a Budapest-based trader at ING Groep NV, wrote in an e-mail today. The government’s plans to phase out foreign-currency mortgages have also dented the forint’s allure, he said.

Central bank President Gyorgy Matolcsy said last week the loosening cycle may continue until the main rate falls to between 3 percent and 3.5 percent. Economy Minister Mihaly Varga and head of the Hungarian Banking Association, Mihaly Patai, met today to discuss the framework for phasing out 570,000 foreign-currency home loans.

‘Unjustified Uncertainty’

Talks between the government and banks will continue in the coming weeks, the economy ministry said in a statement today. The negotiations should be concluded in a “realistic” time frame to avoid “unjustified uncertainty” impacting the financial system and wider economy, the ministry said.

Nine-month forward-rate agreements, used to wager on interest rates, have tumbled 112 basis points to 3.68 percent since reaching a five-month high at the end of June, when investors speculated the central bank may halt or reverse rate cuts. That’s 27 basis points below the Budapest Interbank Offered Rate, according to data compiled by Bloomberg.

The forint is the second-most volatile currency in the past year among 10 peers monitored by Bloomberg in emerging Europe and Africa, after the South African rand.

“Should volatility grow in the forint, then the central bank will probably show some flexibility, but this also depends on how much time the market gives them,” ING’s Csajbok said.

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