Hungary Pressured to Hike Key Rate as War Upends Policy

(Bloomberg) -- The Hungarian central bank is coming under pressure to ditch previous monetary-policy guidance and hike the key interest rate to shore up one of the world's most badly hit currencies in the wake of Russia's invasion of Ukraine.

Policy makers may increase the 1-week deposit rate on Thursday by 40 basis points to 5%, according to the median estimate of nine economists in a Bloomberg survey. Prior to the start of Russia's attack last week, all forecasts pointed to a no change in what is already the highest key interest rate in the European Union.

The forint has plunged more than 5% against the euro to a record low since the start of the war in Hungary's eastern neighbor on Feb. 24. It's the biggest drop in the world after the currencies of sanction-hit Russia and those of Kazakhstan and Kyrgyzstan. The forint is down 1.5% to 381.88 per euro as of 2:46 p.m. in Budapest.

“The forint has been extremely volatile and if there is no significant correction until tomorrow morning, the central bank could raise the one-week deposit rate by more than 30 basis points,” said Mariann Trippon, a Budapest-based economist at Intesa Sanpaolo's CIB Bank in Budapest.

Rate hikes would the “first line of defense” in case of a central bank intervention, Deputy Governor Barnabas Virag told Inforadio in an interview on Tuesday. At the same time, he said Hungary's monetary-tightening cycle would continue to be “predictable” and “flexible,” leaving in the air whether policy makers would hike rates on Thursday.

Since a flurry of weekly rate increases at the end of last year, the central bank has reduced the pace and frequency of effective rate hikes to 30 basis points a month. The last such rate hike was delivered on schedule on Feb. 24.

The weakening of the forint is further darkening the inflation outlook and may prolong the length of the monetary-tightening cycle, Virag told Inforadio. Annual price growth accelerated to an almost 15-year high of 7.9% in January and may touch as high as 8.5% in February, according to the deputy governor.