Economy 17 June 2021, 9:24am

SocGen expects Hungarian forint to firm after rate hike cycle begins

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The Hungarian forint could firm to 335 against the euro by the end of the third quarter after the National Bank of Hungary (MNB) begins its rate hike cycle in June, Societé Generale (SocGen) said in its latest analysis. This means the French bank is substantially more optimistic than the market in general, although it does identify risks in its forecast.

A new era is coming for the HUF as Hungary’s post-COVID recovery has surprised to the upside and the country is likely to close the pandemic-induced gap around mid-2021, SocGen said in its latest emerging markets analysis. Meanwhile, headline inflation rose to more than 5% year on year, in line with the MNB’s projections, but the swift economic upswing and external pro-inflationary factors resulted in a decisive hawkish shift by the MNB in May.

The central bank’s Monetary Council indicated an upcoming rate hike in its official statement in May, and MNB executives have confirmed this several times in recent weeks, so

we can be nearly certain that the MNB will raise the base rate next Tuesday.

SocGen expects a total of 165bp of tightening by the MNB by end-2022, beginning with a 30bp base rate hike in June. Hungary also enjoys strong growth fundamentals, with large FDIs increasing productivity and the export potential. As a result, the HUF is set to reverse the weakening seen over recent years, SocGen said, and to embark on a path of trend appreciation.

The forint could firm to 325 to the euro by the end of 2022, but most of the improvement is expected to take place immediately after the rate hike cycle begins, with a 335 EURHUF price expected this September.

As for risks, any reversal of the MNB’s policy of tolerating excessive inflation could result in a sharp weakening of the HUF, SocGen notes.