Forint is likely to drift weaker in the near term, according to Commerzbank.

Hungary’s National Bank (MNB) will announce its monetary policy decision today. Economists at Commerzbank analyze Forint’s outlook ahead of the meeting.

MNB to continue with rate corridor reduction amidst political volatility

MNB is set to continue lowering its interest rate corridor at this month’s MPC meeting. It has become usual over the past few meetings for the central bank to lower its emergency rate corridor by 100 bps; the same is expected today. But this meeting assumes additional significance because the one-day deposit rate will drop (from 14% to 13%) to the same level as the base rate. The MPC may repeat that it will maintain a cautious approach until inflation has moderated decisively. 

We expect the Forint to underperform its CE3 peers in the coming months, but the degree of reaction to rate cuts will depend on how clearly and unambiguously inflation moderates during this timeframe. Of course, the weakness of the real economy in Germany and the CEE can become a supportive factor for lower interest rates, but we doubt that this justifies a stronger economy.

What is more, at his parliament address on Monday, PM Viktor Orban raised the stakes by announcing that ‘the government had taken over the task and responsibility of fighting inflation. This is a novelty, as usually it is central banks and not governments that have inflation targets. Such remarks will only serve to boost policy uncertainty and are surely negative for the exchange rate.

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