There are two ways to stop the weakening of the forint - investment expert

In his analysis, Viktor Zsiday points out that the fundamental objective of central banks is to set the right interest rate level to ensure the stability of the currency. To do this, developing countries generally need to offer investors an interest rate premium and real yields above inflation. The problem, he says, is that the rate is not constant, but depends on investor sentiment and perceptions, so the central bank has to constantly adapt to market expectations.

However, he argues that the past period has shown that the current Hungarian interest rate level is not sufficient to stabilise the forint.

With the central bank continuously cutting interest rates, the forint weakened further, which Zsiday believes was a serious mistake. While the central bank is not infallible,

the government is clearly responsible for the current situation, which is why investors expect such a high yield premium from Hungary.

"It is very clear that the reason why interest rates are high in Hungary is that both domestic and foreign investors see significant risks. These risks lie in the voluntarist economic policy, the loss of competitiveness caused by the "state being held captive," and the confrontation with the European economic and political system. These are the factors that have kept interest rates high in Hungary. The central bank cannot change them, but it could adjust if it wanted to. The government could change it, but it doesn't want to," Viktor Zsiday wrote in his post.

The current situation could move in one of two directions:

• lowering interest rates further as the forint weakens and risks inflation (he believes this path could lead to high inflation and more serious problems later, such as accelerating euroisation and capital flight), or
• raising interest rates to stabilise the currency.

The third, optimal solution - a change in economic policy - does not seem realistic for the time being, he said, and Hungary will continue to face high interest rates and an unstable financial environment, the investment expert concludes.

Cover photo: Portfolio