Forint Extends Worst Emerging Drop as Central Bank Fails to ActAndras Gergely and Marton Eder
The forint plunged for a third day, extending the worst rout in the world, as the central bank signaled it won’t take immediate steps to stem the slide after cutting interest rates to a record.
The forint depreciated 0.9 percent to 312.19 per euro by 5:25 p.m. in Budapest, taking this week’s retreat to 2.4 percent, the most globally, data compiled by Bloomberg show. Yields on Hungary’s 10-year bonds climbed 15 basis points to 6.15 percent, the highest since Dec. 2 on a closing basis.
Hungary, the most-indebted nation among the European Union’s eastern members, “isn’t under any pressure” to take hasty decisions on the forint, Gyula Pleschinger, a non-executive member of the central bank’s Monetary Council, told reporters on the sidelines of a conference in Budapest today. Policy makers are moving out of step with peers in developing countries including Turkey, India and South Africa, which increased interest rates this week to help stem outflows.
“The central bank should signal that we have hit a wall and it is ready to reverse the rate cuts,” Gergely Palffy, a Budapest-based analyst at Buda-Cash Brokerhaz Zrt., wrote in an e-mailed report today. “Otherwise we may easily see a scenario on the forint market like we did in the case of the Turkish central bank and the lira.”
Turkey’s policy makers more than doubled the benchmark interest rate to 10 percent following an emergency meeting on Jan. 28, after a decision a week earlier to keep rates on hold triggered a selloff that sent the lira to successive record lows. The currency rose 3.3 percent against the dollar in the past five days, the most among developing-nation peers.
A Bloomberg gauge tracking 20 emerging-market currencies had the worst monthly rout since May, when Federal Reserve Chairman Ben S. Bernanke first signaled that the U.S. would reduce its then-$85 billion monthly bond-purchase program. The Fed took monetary stimulus to $65 billion at a meeting this week, contributing to a selloff that dragged currencies from Russia, Poland and Hungary in eastern Europe to Columbia’s peso down more than 1 percent in the period.
Hungary’s central bank slowed its rate reductions to 15 basis points, or 0.15 percentage point, on Jan. 21, lowering the benchmark to a record 2.85 percent. That followed 20 basis-point moves in each of the previous five months and 12 quarter-point cuts between August 2012 and July 2013.
Pleschinger said the bank will take “appropriate steps” if developments justify them, while President Gyorgy Matolcsy, speaking at the same conference, pledged to maintain a “close alliance” with the government, which has advocated lower rates to spur recovery from recession. Hungary’s current-account surplus sets it apart from peers and below-target inflation level gives the central bank “some room” to cut interest rates further, Matolcsy said this week.
“The forint selloff has been fueled by comments from the governor, who believes he will be able to ease monetary policy further,” Jan Bures, a currency analyst at CSOB AS in Prague, wrote in a report today. “He argues the fundamentals are good and inflation low. The markets don’t seem to buy that.”
Official reports last month showed a resurgent car-export industry helped push the current-account surplus to a record 1.1 billion euros ($1.5 billion) in the third quarter.
Hungary’s inflation rate fell to a 43-year low 0.4 percent in December from 0.9 percent in the previous month. Prime Minister Viktor Orban, who is gearing up for elections set for April 6, cut household energy prices by 20 percent in two steps last year and announced a third round of reductions in December.
Although the scope for easing is “certainly dwindling,” there is no reason for the central bank to switch from interest rate cuts to increases, Michal Dybula, an economist at BNP Paribas SA in Warsaw, said in an e-mailed report today.
With a better “growth-inflation mix” outlook than most emerging markets as well as “very robust balance of payment fundamentals,” Hungary should continue to outperform other emerging-market peers, he said.
The currency retreated 4.7 percent versus the euro this month, the most since Sept. 2011.
Forward-rate agreements used to wager on three-month interest rates in three months climbed 24 basis points today to 3.67 percent, bringing the three-day advance to 94 basis points. That compares with the 2.82 percent Budapest interbank offered rate and shows bets for an increase of about one percentage point in the period.