Early Upgrade Foils Hungary No-Cut Goal, Top Forecaster Says

Updated on
  • RBS’s Ambrus sees forint breaching 300 level by end of 2016
  • Forint gains make exports less competitive, hurting growth

A surprise credit upgrade is poised to send Hungary’s currency to peaks not seen since early 2015, potentially forcing an about-face at the nation’s central bank, according to the most accurate forint forecaster.

Royal Bank of Scotland Group Plc senior desk strategist Gabor Ambrus predicts the currency will rally beyond 300 per euro by the end of the year as S&P Global Ratings’ decision to hand Hungary its second investment-grade score drives inflows. The forint has appreciated 1.1 percent since the Sept. 16 decision, the most in developing Europe after the Russian ruble, defying efforts by the National Bank of Hungary to ease monetary conditions without going as far as lowering rates that it’s pledged to keep at 0.9 percent.

"The central bank will need to reevaluate its commitment to not cut the benchmark rate,” said Ambrus, who is the forint’s most-accurate forecaster over the past four quarters according to rankings compiled by Bloomberg. "Based on their communication it’s clear that they would like to avoid cutting rates, but if the gains prove to be persistent then that will bring about a new situation."

The upgrade, which arrived months earlier than the market anticipated, complicates efforts by Hungarian policy makers to counter deflation by keeping the currency weak enough to drive export demand, according to Ambrus. Foreign investors added 96.1 billion forint ($352 million) to Hungarian local-currency bond holdings in the three days after the S&P promotion, government data show, and Morgan Stanley predicts at least $696 million of further purchases when the nation is added to investment-grade indexes next year.

The forint advanced 0.7 percent last week to the strongest since May 2015, extending this year’s gain to 2.9 percent. It weakened 0.2 percent to 306.56 per euro by 1:29 p.m. on Monday in Budapest. Ten-year forint bonds have rallied since the upgrade, pushing the yield 22 basis points lower to 2.8 percent, near a record-low.

As the country emerges from deflation, the debate about whether to engineer a weaker forint through more aggressive easing may be moot. While consumer prices fell year-on-year in the four months to August, analysts predict a return to growth in the coming months as rising wages and consumption become a more important driver than the exchange rate.

Economists see inflation at 2 percent in 2017, the fastest pace since 2012, according to the median estimate of 27 analysts in a Bloomberg survey. Policy makers are targeting a rate of 3 percent, which they expect to reach by mid-2018.

Currency Counterweights

"Policy makers now see internal wage pressure as a more important factor for raising consumer-price growth back to the target and may be questioning how much a weaker currency contributes to the overall outlook," said Gergely Palffy, a Budapest-based analyst at Raiffeisen Bank International AG. The bank’s forecast for the currency to reach a range 305-310 per euro range next year may underestimate its strength, he said.

While the central bank has repeatedly denied having any preference for the exchange-rate’s level, the timing of rate setters’ comments suggesting looser policy and easing steps have led some analysts, including Nomura International Plc, to suppose a de facto cap on gains beyond 310 per euro.

Rate setters said last week they may ease policy further, if needed, by lowering a new limit on three-month deposits that lenders can park at the central bank as a way to push cash into the economy.

"The effectiveness of the central bank on the forint is fading," said Petr Krpata, a currency strategist at ING Groep NV who recommended buying the forint earlier this month because of persistent strength in the face of easier policy.

(Updates prices in 2nd, 5th paragraphs.)
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