Hungary makes surprise hike of one-week deposit rate to prop up currency

The forint has been in a week-long nosedive to historic lows

editor: REMIX NEWS
author: Magyar Nemzet
Logo of the Hungarian National Bank.

In order to prop up the country’s embattled currency, the National Bank of Hungary (MNB) increased its one-week deposit rate by 200 basis points to 9.75 percent on Thursday, surprising markets but lending much needed support to the forint.

“In accordance with the strategy defined in June, the Monetary Council considers it necessary that the increase in the one-week deposit interest rate be integrated into the base rate hike cycle as soon as possible,” the MNB said in a statement.

The MNB traditionally holds meetings of its Monetary Council twice a month, where interest rates and monetary policy changes are announced. At its last meeting on June 28, the MNB raised its base overnight deposit rate by 185 basis points to 7.75 percent, the highest rate hike since October 2008.

“The MNB’s primary goal is to achieve and maintain price stability,” the bank said. “The financial market situation that has developed in recent days increases the risk of lasting inflationary effects and endangers price stability. The impact of unfavorable financial market movements strengthens the risk that high inflation will persist even longer than previously expected.”

“For the central bank, it is of the utmost importance that the short-term interest rates in all sub-markets — especially the swap market — and in every period are in line with the short-term interest rate considered optimal by the Monetary Council,” Gergely Suppan, senior analyst at Magyar Bankholding, said after the announcement.

“To this end, the MNB will start using swap tenders providing currency liquidity within the quarter. The first tender will be held on Friday, July 8, with a one-day term. With its continuous, active market presence, the central bank wants to strengthen the effectiveness of monetary transmission, thereby supporting the achievement and maintenance of price stability,” he added.

The MNB, again in atypical fashion, also announced on Thursday that it would raise the base interest rate at next week’s monetary council meeting after raising the one-week deposit rate by 200 basis points.

As a result of the central bank’s moves, the forint strengthened against the euro to 404. The exchange rate of the dollar fell to HUF 398.62, and the Swiss franc fell to HUF 409.58.

Just a day before, on Wednesday afternoon, the exchange rate of the Hungarian currency reached historic lows against the main currencies. The highest quote for the euro was HUF 416.95, the dollar was HUF 409.82, and the Swiss franc was HUF 421.17.

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