Hungary’s overnight interest rates jump in attack on forint short sellers

The Hungarian central bank has launched a series of measures, including a 9.5 percentage point hike in one of its key interest rates, to stem the fall of the forint and protect the currency from further speculative attacks.

The National Bank of Hungary raised the interest rate on its overnight secured loan facility, through which it lends money to banks, from 15.5% to 25% on Friday. The central bank also launched a one-day currency exchange, aimed at reducing forint trading volumes, with an interest rate of 17%. The one-day fast deposit interest rate was set at 18% to make holding the currency more attractive to short-term investors and deter short-sellers.

Squeezed by investor bets and soaring volume of foreign exchange transactions by energy suppliers, who have to pay for their electricity imports in euros or dollars, the forint this week hit all-time lows against most of major currencies.

To stem market pressure from energy imports, the central bank said it would offer foreign exchange directly to suppliers.

The fall in the currency, which has fallen 5% against the euro in the past two weeks, has hampered the central bank’s ability to control inflation, which topped 20% in September, and should help the authorities to regain some control. on currency movements.

“We can’t just watch things and do nothing,” Deputy Governor Barnabás Virág told an online briefing, adding that the central bank was using the “targeted and temporary tools” to “quickly and flexibly implement stricter monetary conditions” on the interbank market and the exchange market.

The central bank was ready to use the tools “as long as necessary”, he said, adding that he hoped it would take no more than a few days for the market to stabilize.

The forint recouped some of its recent losses, posting its biggest daily gains in more than a decade, rising about 3% to around 418 forints to the euro, according to Bloomberg data. The yield on benchmark five-year government bonds jumped 120 basis points to 12.89%.

The central bank’s policy rate remained stable at 13%. Short sellers have built up large positions against the forint since the central bank announced last month that it would stop tightening the policy rate.

Analysts expect Friday’s actions to ease investor jitters, at least in the short term.

The ability to quickly raise rates and increase the cost of funding short positions by changing the interest rate on overnight deposit offers was like “tactical nuclear weapons,” the analyst said. ‘ING Peter Virovacz.

“The width of the interest rate corridor [between the overnight deposit rate and the overnight loan rate] at 12.5 percentage points, that’s enough to act as a deterrent,” Virovacz said. “It sets limits. If the market starts to test the central bank’s resolve, it can raise the rapid deposit facility rate in one day to well above the current 18%.

He added that a general rise in the base rate would have dampened economic growth at a time when a recession is likely.

The scale of foreign currency transactions with Hungary’s energy suppliers is expected to cost the central bank up to 1.5 billion euros per month.

It held foreign exchange reserves worth 36.5 billion euros at the end of August. However, the currency swap line agreements between Budapest and the European Central Bank, the US Federal Reserve and other national banks will help stem the depletion of reserves.

Weaker growth should lead to lower imports in the coming months, allowing the central bank to eventually remove some of today’s interventions.

Virág pointed out that the markets are worried about Hungary’s deteriorating current account balance, entirely due to rising energy costs, without which Hungary would post a surplus of 2.8 billion euros this year.

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