The coronavirus crisis has pushed the forint to levels over Ft350:€1. This corresponds to the government’s preferences, and the central bank will do just enough to keep it from falling any further.
The early effects of the coronavirus pandemic in Hungary drove the country’s currency to a record low, Ft370:€1, on 18 March. The National Bank of Hungary (NBH, the central bank) responded by hiking the one-week lending rate to 1.85%, from 0.9% previously. It left its 0.9% policy rate unchanged, however. This has so far succeeded in keeping the forint at levels between Ft350 and Ft360 to the euro. That is significantly higher than past years’ averages – between Ft310 and Ft325 from 2015 to 2019 – themselves a departure from pre-2011 rates of Ft250-300.
The country’s ruling party, Fidesz, favours a low exchange rate because of the country’s reliance on exports, particularly in manufacturing. Given the steep decline in global energy prices, food will be the main category of consumer goods to experience a significant price increase. This entails a political risk for the government, especially at a time when nominal wage increases are unlikely and unemployment may hit double digits, up from 3.5% in February.
Fidesz’s overall macroeconomic preferences are unchanged. An unambitious economic package adopted today relies on regrouping budgetary items rather than providing real stimulus, hoping that the nominal increase in the budget deficit will be modest. After a predicted 3-7% GDP contraction this year (depending on how long lockdown measures remain in place), there is hope for a rebound in 2021, fuelled by a pickup in manufacturing exports.
A significant increase of the NBH policy rate is therefore unlikely. Enough will be done to prevent the forint from slumping to Ft370-380 to the euro, but the rate is unlikely to stay below Ft350:€1 for the rest of the year.