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Hungarian Currency to GBP Rate at 3-Year Low, as NBH Dovish

Market CommentaryHungarian Currency to GBP Rate at 3-Year Low, as NBH Dovish
Hungarian Currency to GBP Rate at 3-Year Low, as NBH Dovish
Hungarian Currency to GBP Rate. Image credit: Tomfield.

The Hungarian currency to GBP rate, also called the forint to pound interbank exchange rate, stands at 0.00265 today. This is its weakest in close to 3 years, since July 4th 2016.

Moreover, since the start of this year, the forint has fallen from 0.0028 versus sterling, a loss of -5.36%.

A big factor why the forint to pound exchange rate has weakened is because, last week, Hungary's central bank cut its forecast to hike interest rates further later this year.

At present, this is influencing more strongly the value of the forint versus the pound than other factors, such as the UK's Brexit negotiations.

This could be helpful information for you, if you're a Hungarian living in the UK, or you're a British business owner importing Hungarian products, and you plan to transfer money abroad to Hungary in the near future.

You can get a highly competitive forint to pound exchange rate, by filling in the 'Get A Free Quote' form on the right of this page.

Let's examine more closely the reasons why the Hungarian currency to GBP rate has neared this 3-year low today.

National Bank of Hungary Cuts References to Future Interest Rate Hikes

A big factor why the forint has fallen against the pound is because, last week, the National Bank of Hungary (NBH) cut its outlook for future interest rate hikes.

Last Tuesday 26th March, the NBH raised interest rates for the first time since December 2011, over 7 years, by +0.1%, up to -0.05%.

This interest rate hike followed months of suggestions by Hungary's central bank that it would begin an interest rate raising cycle, to combat surging prices pressures in Hungary, being fuelled by strong wage growth and consumption in the central European country.

However, in the NBH's statement accompanying its decision to hike interest rates, Hungary's central bank surprised financial markets by excluding previous references to further rate hikes. In particular, the NBH dropped a reference to a "gradual and cautious" interest rates normalisation process.

To justify its decision to hold off raising interest rates further, Hungary's central bank said that, although "persistently buoyant domestic demand" was lifting Hungary's price pressures, "weakening external activity" was restraining inflation. To be specific, the NBH referenced the Eurozone's slowing economy.

As a result, the NBH cut its outlook for headline 2019 inflation by -0.2% from its December forecast, to just 2.9%. This is beneath the National Bank of Hungary's inflation objective of 3.0%.

NBH Governor Gyorgy Matolcsy said that "We took a necessary but sufficient decision as a one-off… this amounts to a change in monetary policy but it doesn’t change its character." Mr. Matolcsy added that Hungary's monetary policy will remain "loose".

Following the NBH's announcement last Tuesday, financial markets and economists revised downward their predictions for Hungary's interest rates for this year and next. Lower interest rates make buying Hungarian assets less profitable, in turn cutting demand for the forint, and its value. So this has helped weaken the Hungarian currency to GBP rate.

NBH Deputy Governor Nagy Confirms One-Off Interest Rate Hike

In addition, a further factor that's contributed to weaken the value of the forint versus sterling is that, following Hungary's central bank's decision last Tuesday, a NBH Deputy Governor has confirmed that the choice to raise interest rates was a "one-off and done".

Last Thursday 28th March, NBH Deputy Governor Marton Nagy told the Hungarian financial news website Portfolio.hu that the National Bank of Hungary would not hike interest rates again in the near future.

In particular, Mr. Nagy said that "we now consider the current monetary conditions to be normal", and that, were the NBH to hike interest rates again, there was an "exceedingly high" risk that this could be a mistake. This strongly suggests that Hungary's interest rates will stay at -0.05% for the foreseeable future.

Also, Mr. Nagy highlighted that it was the changing international economic landscape that had changed the NBH's mind, rather than Hungary's domestic economy. The Deputy Governor said that "The international environment changes rapidly. In that situation, any strong forward guidance would be irresponsible and would jeopardise our credibility."

Following Mr. Nagy's statement, an anonymous fixed income trader based in Budapest said that "the market's assessment is that this rate hike was a one-off." So this too has contributed to weaken the Hungarian currency to GBP rate.

UK Prime Minister May Calls for Cross-Party Brexit Talks with Corbyn

However, following the National Bank of Hungary's interventions, it's conceivable that, looking ahead, the UK's Brexit talks will more clearly affect the forint to pound exchange rate. This is because the Brexit negotiations have had a large influence on the value of sterling versus other currencies in recent weeks.

In particular, last night UK Prime Minister Theresa May announced at Downing Street that she'll hold cross-party talks with the opposition Labour Party, to end the Brexit deadline.

This follows two rounds of "indicative votes" in the House of Commons, where MPs have both rejected Mrs. May's draft Withdrawal Agreement, plus the other Brexit possibilities.

In reply, Mr. Corbyn has said that he'll be "very happy" to talk to the Prime Minister. Meanwhile, European Council President Donald Tusk has recommended that EU leaders be "patient" while the UK decides what sort of Brexit it wants. These responses have encouraged financial markets that the UK will eventually exit the EU with a deal.

That said, it's important to add that Mrs. May's offer of cross-party talks has escalated tensions within her Conservative Party. For example, following the Prime Minister's announcement, former foreign secretary Boris Johnson warned that Mrs. May is "entrusting the final handling of Brexit to Labour". This may complicate the Brexit outlook.

So to sum up, the Hungarian currency to GBP rate has neared a 3-year low, as the National Bank of Hungary has removed its guidance for further interest rate hikes.

That said, looking forward, the UK's Brexit negotiations may influence the value of the pound versus the forint, although given the complications of Brexit, it remains to be seen how.

Bibliography

  1. Anonymous, "UPDATE 1-Strong forward guidance would be "irresponsible" -Hungary cenbank", Reuters.com, April 2nd 2019, https://www.reuters.com/article/hungary-cenbank/update-1-strong-forward-guidance-would-be-irresponsible-hungary-cenbank-idUSL8N21K0D8
  2. Anonymous, "Forint slides as central bank tightening is one-off", Nasdaq.com, March 26th 2019, https://www.nasdaq.com/article/forint-slides-as-central-bank-tightening-is-oneoff-20190326-00771
  3. Anonymous, "Export outlook worsens for CEE – yields down, FX mixed", FXStreet.com, April 1st 2019, https://www.fxstreet.com/analysis/export-outlook-worsens-for-cee-yields-down-fx-mixed-201904010744
  4. Anonymous, "Brexit: PM asks Corbyn to help break deadlock", BBC.com, April 2nd 2019, https://www.bbc.com/news/uk-politics-47794235
  5. Eder, Marton and Simon, Zoltan, " Hungary's Matolcsy Bucks Expectations With Dovish Tightening", Bloomberg.com, March 26th 2019, https://www.bloomberg.com/news/articles/2019-03-26/hungary-raises-overnight-rate-to-start-unwinding-stimulus
  6. Peto, Sandor, "CEE MARKETS-Forint falls as central bank calls inflation risk balanced", Reuters.com, March 28th 2019, https://www.reuters.com/article/easteurope-markets/cee-markets-forint-falls-as-central-bank-calls-inflation-risk-balanced-idUSL8N21F5LB
  7. Szakacs, Gergely, "UPDATE 2-Market went too far in pricing Hungary rate hikes -cbanker", Reuters.com, March 28th 2019, https://www.reuters.com/article/hungary-cenbank/update-2-market-went-too-far-in-pricing-hungary-rate-hikes-cbanker-idUSL8N21F28G

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or email peter.lavelle@purefx.co.uk.

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