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

Hungary’s central bank has launched a series of measures, including a 9.5 percentage point rise in one of its key interest rates, to stem the fall in the forint and shield the currency from further speculative attacks.

The National Bank of Hungary raised the interest rate on its overnight collateralised loan facility, through which it lends money to banks, from 15.5 per cent to 25 per cent on Friday. The central bank also launched a one-day foreign exchange swap, aimed at lowering volumes of forint trades, with an interest rate of 17 per cent. The interest rate on a one-day quick deposit tender was put at 18 per cent to make holding the currency more attractive for short-term investors and deter short sellers.

Squeezed by investors’ bets and the soaring volume of foreign exchange transactions by energy suppliers, which must pay for their imports of power in euros or dollars, the forint hit record lows against most major currencies this week.

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

The fall in the currency, which dropped as much as 5 per cent against the euro over the past two weeks, hampered the central bank’s ability to rein in inflation, which surpassed 20 per cent in September, and is expected to help officials regain some control over foreign exchange movements.

“We can’t just watch idly,” said deputy governor Barnabás Virág in an online briefing, adding that the central bank was using the “targeted and temporary tools” to “quickly and flexibly enforce stricter monetary conditions” on the interbank market and the swap market.

The central bank was prepared to use the tools “as long as necessary”, he said, adding that he hoped it would not take more than a few days for the market to stabilise.

The forint recovered some of its recent losses, posting its biggest daily gains in more than a decade, rising about 3 per cent to around 418 forints per euro, according to Bloomberg data. The benchmark five-year government bond yield soared up 120 basis points to 12.89 per cent.

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

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

The capacity to raise rates rapidly and increase the cost of financing the short positions by altering the interest rate on the one-day deposit tenders were like “tactical nukes”, said ING analyst Peter Virovacz.

“The width of the interest rate corridor [between the overnight deposit rate and the overnight loan rate] at 12.5 percentage points is this large to be able to serve as a deterrent,” said Virovacz. “It sets boundaries. If the market begins to test the central bank’s resolve they can raise the rate on the one-day quick deposit facility well above the current 18 per cent.”

He added that a blanket rise of the base rate would have damped economic growth at a time when recession is likely.

The scale of the foreign currency transactions with Hungary’s energy suppliers is expected to cost the central bank up to €1.5bn a month.

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

Weaker growth is expected to lower imports in the coming months, enabling the central bank eventually to remove some of today’s interventions.

Virág stressed that the markets were anxious about Hungary’s deteriorating current account balance, which was entirely down to the rise in the cost of energy, without which Hungary would post a surplus of €2.8bn this year.