Pound to Forint: Shallow Rate Cut sees GBP/HUF Pull Back

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The Forint strengthened after Hungary's central bank (MNB) cut interest rates by 25 basis points, which was less than the consensus was expecting.

The Pound to Forint exchange rate slid and is a third of a per cent lower on the day at 466.80 as the scope for further rate cuts at the MNB appears to be closing. Markets have pared expectations for cuts in the second half of the year. which is supporting HUF.

The MNB said the base rate will fall to 7.00% tomorrow, whereas the consensus looked for a cut to 6.75. The smaller-than-expected cut underpins Deputy Governor Virag's guidance that there is “very very limited” scope for monetary easing in the second half of this year.

Nicholas Farr, Emerging Europe Economist at Capital Economics, says the MNB's decision could reflect concerns with the Forint's recent slide against the Euro and other major currencies.

HUF has fallen in value by nearly 7.0% against the Pound in 2024 and 5.0% against the Euro, raising the cost of imports, and boosting imported inflation rates. Against the Dollar, the loss is 6.0%.

"We suspect that the ~3% fall in the forint against the euro since the last meeting may have encouraged policymakers to err on the side of caution," says Farr.

Hungarian inflation is yet to fall to target, and the central bank will worry cutting too much by way of cuts will prompt a rebound in inflation.

This can give the MNB a reason to pause, offering HUF further support.

"CEE currencies for now are not under pressure, but markets will probably remain nervous about financial conditions becoming excessively loose, especially with wages still growing at double-digits on an annualised basis," says Bob Savage, Head of Markets Strategy at BNY Mellon.