The longest currency losing streak in almost three years is underscoring investor angst about Hungary’s commitment to rein in the fastest inflation in the European Union amid signs of a hard landing for the economy.
(Bloomberg) — The longest currency losing streak in almost three years is underscoring investor angst about Hungary’s commitment to rein in the fastest inflation in the European Union amid signs of a hard landing for the economy.
The Hungarian currency fell for an eighth day against the euro on Thursday, the longest period of decline since 2020. It’s trading at the weakest level in more than three months after data confirmed a double-digit decline in retail sales and a more modest contraction in industry output.
Those indicators added to recent evidence that Hungary’s economy, which has been in recession since the second half of last year, is struggling to break out of a negative spiral. On top of that, data due Friday is set to show inflation remaining above 20%, according to a Bloomberg survey.
The central bank raised its key overnight rate to 18% last year to suppress price growth but then started easing to align that gauge with its 13% base rate. While policy makers have pledged to be cautious with rate cuts, Prime Minister Viktor Orban’s point-person for the economy, Marton Nagy, has floated the idea of raising the 3% inflation target to spur economic recovery.
“The central bank’s garnered credibility is on the line, so I would advise Orban to tread carefully when listening to his economic chief,” Malin Rosengren, a bond fund manager at RBC BlueBay Asset Management said. “Repricing wouldn’t be forgiving.”
Interest Payments
The EU’s highest borrowing costs have led to soaring interest payments on Hungary’s debt, contributing to a budget deficit that reached 9.8% of gross domestic product in the first quarter. A record year-to-date shortfall through May has pushed Orban to cut spending and extend special taxes across industries, including banking and energy.
The declines in retail sales have in particular hurt Hungary’s budget by cutting value-added tax revenue, which has served as a fiscal anchor until recently. Domestic consumption has plunged as inflation cut disposable incomes.
“Some investors could be speculating that the central bank would be pressured into more aggressive rate cuts,” said Peter Virovacz, an economist at ING Bank’s Hungarian unit said. “For now, we don’t think they will change course.”
The central bank will hold its next interest rate decision on July 25, which will provide clues whether the easing cycle slows or even pauses in the face of the weaker forint.
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