Forint Hits 11-Month High as Inflation Supports Tight Rates

Shoppers in Budapest. Photographer: Akos Stiller/Bloomberg Photo by Akos Stiller /Bloomberg

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(Bloomberg) — The Hungarian forint hit the strongest in almost 11 months after data showing sticky inflation bolstered arguments for central bank monetary-policy caution. 

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The central European nation is confronting persistent consumer price growth and sluggish economic activity, with pre-election spending plans adding to pressure on the budget and preventing policymakers from lowering one of the highest borrowing costs in the European Union.    

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Headline inflation was an annual 4.3% in July, slower pace than 4.6% in June but still exceeding the upper end of the central bank’s tolerance band, according to data published by the statistics office on Friday. The reading was also above the 4.1% median estimate in a Bloomberg survey of economists. Prices rose 0.4% on the month. 

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The forint gained 0.3% to 395.8 per euro by 10:30 a.m. in Budapest, the strongest since September 2024. Policymakers kept the key interest rate at 6.5% in July for a 10th month, citing the need for cautious and tight monetary policy to anchor household inflation expectations.

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With average price growth expected to stay above 4% in the next two years, monetary policy is likely to remain tight, ING Bank said in a note. 

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Eastern European currencies have also been supported by the announcement of planned talks on Russia’s war in Ukraine, allowing the forint to “enjoy some favorable conditions stemming from the global narrative,” ING said in a separate report. 

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“The Ukrainian-Russian headlines are clearly positive news for Hungary, which remains by far the most reliant on Russian energy imports among central and eastern European countries,” ING said.

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Prime Minister Viktor Orban’s government has blamed the war in neighboring Ukraine for high inflation and stuttering economic growth. It has sought to nudge prices lower with regulatory curbs on items comprising the consumer basket used to calculate inflation.

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The cost-of-living crisis has also become one of the top issues for voters ahead of elections likely to be held in April, with Orban’s ruling Fidesz party trailing a surging opposition in most polls. 

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Despite Orban’s regulatory measures, food prices rose 5.9% in July from a year earlier, with households also paying 10.9% more for energy, the data showed. The price of services advanced 5.3%.

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(Updates with forint, analyst comment)

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