19/06/2003 16:23
Hungary raised interest rates by 2 percentage points on Thursday in a bid to stem the forint's recent slump to record lows and boost investor confidence in its markets.
The central bank raised its key rate to 9.5 per cent, and in a joint press conference, finance minister Csaba Laszlo and central bank governor Zsigmond Jarai stressed their agreement on the need for a stronger forint and maintained the economy was in good shape.
Investors had begun pricing in the likelihood of a rate rise, but the timing of the move was unexpected as the bank holds regular bi-weekly meetings on Mondays.
Hungary raises rates
For more on last week's rate decision and the impact on the forint. Click here
Thursday's move appeared to have been prompted by fears the forint's recent falls could slide out of control. Investors began shifting funds out of Hungary earlier this month, weakening the currency, on fears of a policy deadlock between the government and the central bank.
Early in June, the central bank and the government jointly announced a weakening of the central level at which the forint trades against the euro. The currency trades in a band 15 per cent either side of the central rate and its relative strength had prompted calls for a weakening from the country's exporters.
The de facto devaluation surprised investors and led to a sharp sell-off in the currency. That sell-off became more pronounced after the central bank unexpectedly raised rates on June 10, prompted by fears a weaker currency would boost inflation above its target. Higher interest rates, and corresponding higher bond yields, should encourage investor interest in Hungarian bonds.
Unlike other eastern European countries, Hungary is experiencing net outflows of investment, implying capital inflows into its bond markets are even more important in funding its current account deficit, which is running at about 5 per cent of GDP.
But analysts were cautious about the likely impact of Thursday's rate rise.
"Today's rate hike has at least helped to prevent the forint's further slide but I believe it is not much going to help the currency to strengthen to NBH's desired level of Ft250.00," said Ozgur Yasar Guyuldar, strategist at K&H Equities in Budapest. "Unless there is a consensus in the market that the forint has bottomed out, I believe investors would stay away from Hungary."
The news prompted the euro to slide to Ft265 from Ft270.25 on Thursday. The central rate against which it trades is Ft282.36 against the euro compared with the previous fixing of Ft276.1. The change in the central rate means the forint is permitted to trade between Ft324.71 and Ft240.01.
The central bank raised its key rate to 9.5 per cent, and in a joint press conference, finance minister Csaba Laszlo and central bank governor Zsigmond Jarai stressed their agreement on the need for a stronger forint and maintained the economy was in good shape.
Investors had begun pricing in the likelihood of a rate rise, but the timing of the move was unexpected as the bank holds regular bi-weekly meetings on Mondays.
Hungary raises rates
For more on last week's rate decision and the impact on the forint. Click here
Thursday's move appeared to have been prompted by fears the forint's recent falls could slide out of control. Investors began shifting funds out of Hungary earlier this month, weakening the currency, on fears of a policy deadlock between the government and the central bank.
Early in June, the central bank and the government jointly announced a weakening of the central level at which the forint trades against the euro. The currency trades in a band 15 per cent either side of the central rate and its relative strength had prompted calls for a weakening from the country's exporters.
The de facto devaluation surprised investors and led to a sharp sell-off in the currency. That sell-off became more pronounced after the central bank unexpectedly raised rates on June 10, prompted by fears a weaker currency would boost inflation above its target. Higher interest rates, and corresponding higher bond yields, should encourage investor interest in Hungarian bonds.
Unlike other eastern European countries, Hungary is experiencing net outflows of investment, implying capital inflows into its bond markets are even more important in funding its current account deficit, which is running at about 5 per cent of GDP.
But analysts were cautious about the likely impact of Thursday's rate rise.
"Today's rate hike has at least helped to prevent the forint's further slide but I believe it is not much going to help the currency to strengthen to NBH's desired level of Ft250.00," said Ozgur Yasar Guyuldar, strategist at K&H Equities in Budapest. "Unless there is a consensus in the market that the forint has bottomed out, I believe investors would stay away from Hungary."
The news prompted the euro to slide to Ft265 from Ft270.25 on Thursday. The central rate against which it trades is Ft282.36 against the euro compared with the previous fixing of Ft276.1. The change in the central rate means the forint is permitted to trade between Ft324.71 and Ft240.01.
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