Forint underperforms central European currencies on faster rate-cut bets

Forint weakened: The Hungarian forint slipped to a two-week low against the euro on Wednesday, underperforming other central European currencies following comments by a top central banker that heightened expectations of a faster pace of rate cuts.

Deputy Governor Barnabas Virag of the Hungarian central bank indicated that interest rates between 6 per cent and 7 per cent by mid-2024 are realistic, especially after December data showed inflation dropping to 5.5 per cent, well below projections. Virag suggested there are compelling arguments for reducing interest rates by either 75 basis points (bps) or 100 bps at the end of the January rate-setting meeting.

Fueled expectations 

The forint weakened in response to these comments, as they fueled expectations for a 100 bps cut at the next meeting, surpassing the earlier anticipation of a 75 bps cut, according to a trader in Budapest. The currency was down 0.26 per cent, trading at 380.65 per euro, reaching a two-week low at 381 earlier in the session.

The National Bank of Hungary has already cut borrowing costs by 725 bps since May, bringing rates to 10.75 per cent. However, Prime Minister Viktor Orban's government, confronted with economic challenges and an extensive 2024 election calendar, has been urging the central bank for more substantial cuts. The NBH is set to convene for its next policy meeting on January 30.

Meanwhile, the Polish zloty slipped 0.19 per cent to 4.3975 per euro, extending previous losses amid political tensions in Warsaw. The Czech crown also declined by 0.21 per cent to 24.782 per euro after a central banker suggested that interest rates could continue decreasing following recent monetary easing.

Stocks across the region experienced declines, with Warsaw's index leading the losses by shedding 1.28 per cent. The economic landscape in Central Europe is currently influenced by both monetary policy decisions and political dynamics, creating an environment of cautious investor sentiment.

(with Reuters inputs)