Introduction to Hungarian Economy and Central Bank
The central bank of Hungary has recently sent a signal that cutting interest rates is not a viable option for the time being. This message comes at a time when the Central and Eastern European (CEE) foreign exchange (FX) market is experiencing a sense of relief due to the Middle East ceasefire, which is further boosting the value of the Hungarian forint.
Current Market Trends
In the past two days, the forint has strengthened significantly, moving from levels around 404 to nearly 401 by the end of a press conference. The future trajectory of the forint is highly dependent on geopolitical developments, but assuming no major changes, the conditions for a stronger CEE FX in the summer appear to be supportive of the forint. With the EUR/USD exchange rate hovering around 1.160 and the regional risk premium being priced out, the EUR/HUF exchange rate could potentially approach the 400 mark again.
Challenges and Uncertainties
However, reaching this threshold is uncertain, given the current tailwinds. The deteriorating outlook for the Hungarian economy, as confirmed by the new NBH forecast, suggests that the market will likely push for more interest rate cuts in the future, either this year or next. This could lead to an increase in the EUR/HUF exchange rate, with a predicted level of 415 by the end of the year.
Interest Rate Expectations
The market has corrected its expectations in recent times, erasing about 50 basis points (bp) of easing since the beginning of May. Despite this, the market still expects roughly 100bp of interest rate cuts, with one cut anticipated this year and the rest next year. The NBH’s significantly worse GDP outlook and higher inflation profile for next year may influence these expectations.
Analyzing Market Conditions
Given the rapidly changing global and local conditions, it is challenging to dispute the market’s view from current levels. Nevertheless, 100bp still seems excessive in the current context. We prefer the pay side of the market at the front-end and the belly of the curve, as the long-end has declined in recent days, following core markets. The 5y5y rate has decreased from 7.45% to 7.25%, where the market may see an opportunity to pay again.
Conclusion
In conclusion, the Hungarian economy and central bank’s recent signals suggest that interest rate cuts are not on the horizon for the time being. While the forint has strengthened recently, the deteriorating economic outlook and potential for future interest rate cuts may lead to an increase in the EUR/HUF exchange rate. As market conditions continue to evolve, it is essential to monitor developments and adjust expectations accordingly. The current inflation problem in Hungary does not seem too severe, given the weak GDP outlook, and the long-end of the curve may be too high despite recent declines.
