beyondbrics

The forint’s summer vacation is over.

For a month the Hungarian currency had seen only moderate risk aversion from investors, but now it is under selling pressure once more. The forint lost over 2 per cent against both the euro and the dollar between Monday morning and Tuesday afternoon – although later on it did recover slightly.

The consensus explanation is a statement by Hungary’s central bank, which analysts viewed as somewhat hawkish.

On Monday, the National Bank of Hungary raised its average inflation forecast for 2011 and 2012 by half a percentage point (in part because of the weaker forint) and cut its 2011 economic growth by 0.4 percentage points to 2.8 per cent.

Added to the mix was a report in Hungarian newspaper Népszava that the new centre-right Fidesz government is still determined to get rid of central bank governor Andras Simor, whose monetary policy and personal finances have made him persona non grata.

But in truth, the Hungarian currency’s strident performance since the IMF walked away from budget talks last month had been a bit of a surprise.

Not, perhaps, for Viktor Orban, Hungary’s crowd-pleasing prime minister, who believes Hungary can do without the IMF and has so far declined to commit to reducing the budget deficit below 3 per cent next year.Instead Orban has vowed to restore Hungary’s “economic self-rule, because there is no economic growth without it”.

But if Tuesday’s currency fluctuations are anything to go by, Orban may yet turn out to be a prisoner of financial markets, and ironically, of his declared enemy, the central bank.

In a note this morning Eszter Gargyan of Citibank wrote:

In our view, the key message of the monetary policy committee meeting is that due to the rise in inflation outlook the next policy move is likely to be a hike.

This may happen as early as in the coming months, unless a narrowing risk premium supports the currency or the government implements further austerity measures in 2011.

Or to put it another way: unless the government appeases financial market – for example, by toeing the line of fiscal prudence – the central bank may be forced to raise rates, thereby hampering Fidesz’s electoral pledge to kick-start economic growth.

This is hardly a recipe for rapprochement between Orban and governor Simor. No wonder the forint is feeling the heat.