Hungary Hikes Key Rate More Than Expected as War Hits Forint

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The Hungarian central bank hiked its key interest rate more than expected, ditching previous monetary-policy guidance to shore up one of the world's hardest-hit currencies in the wake of Russia's invasion of Ukraine.

Policy makers increased the 1-week deposit rate on Thursday by 75 basis points to 5.35%, more than the 50 basis-point median estimate in a Bloomberg survey. Prior to the start of Russia's attack last week, all forecasts pointed to no change in what was already the highest key interest rate in the European Union.

“The Hungarian central bank did what it could and it is an important signal,” said Marek Drimal, a London-based strategist at Societe Generale SA. “Still, it will be very difficult to change the course of the forint - like elsewhere in central and eastern Europe” because the geopolitical backdrop made the region a “terrible” market environment.

The forint has plunged 4.5% against the euro to a record low since the Feb. 24 start of the war in Hungary's eastern neighbor, the fourth-biggest drop in the world in the period.

The forint strengthened from more than 380 per euro just before the rate decision to trade at 378.3 at 9:22 a.m. in Budapest, 0.1% weaker than the day before. Regional peers the Polish zloty and Czech koruna fell 0.6% and 0.4% against the euro, respectively.

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. 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.