Hungary’s unorthodox rate rise: doing its bit for bondholders

An unorthodox interest rate rise of 12 per cent by Hungary’s central bank should be a winner for foreign investors in the €930bn local currency government bond market. The move last week was meant to prevent further depreciation of the forint. That is one of three elements needed to lower the yields and raise the prices of government debt.

The other two items to watch are fiscal policy and the release of EU funds. The first looks well anchored. The government has shown determination in keeping spending down. The release of EU funds is less assured. The government seems confident this will happen in December. The EU has yet to say.

The central bank’s move had two immediate effects. The forint soared against the euro. It is up almost 4 per cent since the rise on October 14. Bond yields also rose as prices fell, with the benchmark 5-year yield up 0.6 percentage points to 12.23 per cent over the past week, according to Refintiv data. The government hopes the currency will hold its gains and bond yields fall back. It is in with a chance.

On Friday, the central bank widened its “interest rate corridor”, between the unchanged policy rate at 13 per cent and the overnight collateralised loan rate, up 9.5 points to 25 per cent. The one-day deposit facility offers 18 per cent, which the bank can raise at will. The aim is to suck liquidity out of the foreign exchange and interbank markets. That is bad news for investors who have shorted the forint since the central bank called a halt to its policy rate tightening cycle last month.

The bank also said it would offer foreign currency directly to energy importers, taking a further chunk out of the market. Hungary’s bill for imported energy is about €12bn; that aside, it would run a current account surplus of almost €3bn. It is far more exposed to soaring energy costs and has much less room to diversify supplies, particularly away from Russia, than other countries nearby.

Taken together, the bank hopes its measures will strengthen the forint and help it fight inflation by keeping import prices in check. That, along with fiscal discipline, should be good for bondholders. The rest is up to Brussels.