Hungarian forint rallies as central bank cuts rates

The Hungarian forint rallied sharply on Tuesday after the central bank slashed the main interest rate more than expected, further boosting growth prospects of the east European economy.

The forint had come off a two-week low earlier on the day anticipating a cut but the market that had been largely expecting a cut margin of 10 basis points was surprised as the bank delivered a 15 basis points reduction.

The USD/HUF slipped to 282.14 from the previous close of 286.42, making a 1.4% rally in the forint. Monday's close was its highest since 7 July. The move on Tuesday has snapped a four-day losing streak of the forint.

However, that the forint still trades quite near its record low against the US dollar weighs on the outlook for the Hungarian currency. The USD/HUF had traded as high as 290.58 earlier this month, almost matching the March record of 292.26.

The forint has pared some of its July losses but is still down 0.8% so far on the month, adding to the 4.3% decline over May and June.

The Hungarian central bank has been on an easing cycle since late 2012 when the benchmark interest rate was 7%. At the start of this year it was 3% and by the 23 June decision, it has been lowered to 1.5% by three instalments from there.

The rate decision will be at 1:00pm GMT Tuesday. The wage growth data released earlier in the day showed decelerating wage inflation in the country. Hungarian wages grew 1.5% from a year earlier in May, down from 3.6% in June.

Tuesday's decision showed that the recent rise in the consumer price inflation rate has failed to prompt the central bank to hold.

The headline inflation rate of Hungary rebounded to positive territory in May after showing deflation numbers for eight straight months. The rate then accelerated to 0.6% in June from the previous month's figure of 0.5%.

The economic expansion rate has been steady for the east European country but analysts are predicting a slowdown in the second quarter.

The year-on-year growth rate has been in the range of 3.3% to 4.1% since the first quarter of last year and this year's first quarter rate was 3.5%, compared to 3.4% in Q4-2014 and 3.3% in Q3-2014. The Q2 GDP data will be out on 14 August and some forecasters have predicted 3.2% growth rate for the June quarter.