Forint Suffers Biggest Emerging-Market Loss on Surprise Rate Cut

  • Decision confirms NBH desire for weaker currency: Rabobank
  • Central bankers diverge from East Europe peers to follow ECB

The forint weakened the most in the developing world after a surprise interest rate cut by the National Bank of Hungary, which pledged “all available tools” to spur inflation.

Hungary’s currency touched a five-week low before trading 0.3 percent weaker at 311.56 per euro at 6:49 p.m. in Budapest after local policy makers followed the European Central Bank with stimulus, in contrast with more hesitant peers in Poland and Romania. The nation’s bonds rose following the announcement, with the yield on the 10-year note falling five basis points to 3.041 percent, the lowest in more than a year.

"Today’s unexpected rate cut accompanied by a dovish statement is a confirmation that the central bank prefers a weaker currency to stimulate inflation and economic activity," said Piotr Matys, an emerging markets currencies strategist at Rabobank in London, in an e-mail.

Hungary is seeking to temper gains in its currency that threaten export competitiveness as growth lags behind regional peers and inflation falls short of the central bank’s 3 percent target. The forint has been buoyed by developments elsewhere increasing the allure of Hungarian assets: a record expansion of monetary stimulus by the ECB this month pushing yields further into negative territory and political gridlock in Poland.

Hungary’s central bank lowered the rate to a record 1.20 percent from 1.35 percent, defying 18 of 19 forecasts by economists for no change. It had avoided stimulus for seven months but last month reversed a pledge to keep its benchmark rate on hold until the end of 2017. The overnight deposit rate turned negative for the first time, while the cost for collateralized loans fell by 65 basis points to 1.45 percent.

Gains Checked

Before today, the forint outperformed East European peers, gaining 1.25 percent year-to-date. Eszter Gargyan, an economist at Citigroup in Budapest expects two more rate cuts this year to deflate the currency.

"The NBH easing may make the forint a temporary underperformer in the central and eastern European region," she said.

The National Bank of Hungary said it doesn’t have an exchange-rate target. The regulator cut its forecast for this year’s inflation rate to 0.3 percent from 1.7 percent, while the 2017 projection was lowered to 2.4 percent, according to a statement on its website. The prediction for economic growth was raised to 2.8 percent from 2.5 percent.

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