Bloomberg News

Forint Weakens After Central Bank Raises Rate to Highest in EU

November 30, 2011

Nov. 29 (Bloomberg) -- The forint weakened after the central bank raised the benchmark interest rate to the European Union’s highest and said it may tighten further as a credit rating downgrade to junk level hit Hungarian assets.

Hungary’s currency weakened 0.3 percent to 309.5 per euro by 3:54 p.m. in Budapest, extending its decline in the second half of 2011 to 14 percent, the worst performance worldwide. Hungary’s benchmark 5-year bonds weakened, lifting the yield seven basis points to 9.38 percent.

The Magyar Nemzeti Bank increased the two-week deposit rate to 6.5 percent from 6 percent today. The forint dropped to its weakest ever against the euro this month and government bond yields soared over 9 percent for the first time in two years as the country on Nov. 24 lost its investment grade at Moody’s Investors Service after 15 years.

“If this afternoon’s 50 basis point hike in Hungarian interest rates was intended to shore up the forint, the move has flopped,” Neil Shearing, London-based chief emerging markets economist at Capital Economics, wrote in a research report.

Fourteen of 25 economists in a Bloomberg survey expected policy makers to raise the rate to 6.5 percent, with five predicting an increase to 6.25 percent, one to 7 percent and five forecasting unchanged rates.

“Fifty basis points was probably seen as something of a compromise in terms of taking more aggressive action in defense of the forint,” Timothy Ash, a London-based economist at Royal Bank of Scotland Plc, wrote in a research report.

--Editors: Linda Shen, Peter Branton

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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