Hungarian Forint Rally Against Euro Reassessed After Rate Cuts, Says Societe Generale

Societe Generale has reassessed the recent rally of the Hungarian forint against the euro, concluding that the currency’s strength may be tempered following a series of rate cuts by the Hungarian central bank. The French investment bank’s analysis, published this week, signals a shift in outlook for the EUR/HUF pair, which has seen the forint gain ground in recent months.

Rate Cuts and Forint Performance

The Hungarian National Bank (MNB) has implemented multiple interest rate reductions since late 2023, lowering its base rate from 13% to 6.5% as of September 2024. These cuts were aimed at stimulating an economy facing weak domestic demand and a slowdown in the eurozone, Hungary’s primary export market. Initially, the forint strengthened against the euro, defying expectations that lower rates would weaken the currency. Societe Generale notes that this rally was driven by improved investor sentiment and a narrowing of Hungary’s risk premium, as the central bank’s actions were seen as a sign of economic stabilization.

However, the bank now cautions that the forint’s rally may have run its course. The pace of rate cuts has accelerated, and with inflation still above the MNB’s target range of 2% to 4%—standing at 3.7% in August 2024—further monetary easing could pressure the forint. Societe Generale’s analysts point out that the currency’s recent gains have already priced in much of the positive news, leaving limited upside without fresh catalysts.

Market Implications and Investor Outlook

For investors holding Hungarian assets, the reassessment carries significant implications. The forint’s strength had made Hungarian government bonds and equities more attractive to foreign buyers, as currency appreciation added to returns. A reversal of this trend could dampen demand, particularly if the MNB continues to cut rates aggressively. Societe Generale suggests that the EUR/HUF exchange rate may stabilize around current levels, with potential for modest depreciation in the coming months.

The broader emerging market context also matters. Central banks across Central and Eastern Europe, including Poland and the Czech Republic, have also been easing policy, creating a competitive dynamic. Hungary’s relatively high current account deficit—around 2.5% of GDP in 2024—makes the forint more vulnerable to shifts in global risk appetite. If the U.S. Federal Reserve delays rate cuts, as some analysts expect, emerging market currencies like the forint could face headwinds.

What This Means for Readers

For Hungarian businesses and consumers, a weaker forint would raise the cost of imports, potentially feeding into inflation. This could complicate the MNB’s policy path, as it balances the need to support growth with price stability. For international investors, the reassessment serves as a reminder that currency rallies in emerging markets are often fragile, especially when driven by central bank policy changes. Societe Generale’s analysis provides a data-driven framework for monitoring these risks.

Conclusion

Societe Generale’s reassessment of the Hungarian forint’s rally reflects a nuanced view of the currency’s prospects after recent rate cuts. While the forint has benefited from improved sentiment, the bank warns that further gains are unlikely without stronger economic fundamentals. Investors and policymakers should watch for signals from the MNB and global markets to gauge the forint’s next move.

FAQs

Q1: Why did the Hungarian forint rally despite rate cuts?
The forint strengthened because rate cuts were seen as a sign of economic stabilization, reducing Hungary’s risk premium and attracting foreign investment. Improved investor sentiment offset the usual negative impact of lower rates on a currency.

Q2: What is Societe Generale’s current outlook for the forint?
Societe Generale expects the forint to stabilize near current levels against the euro, with potential for modest depreciation if the central bank continues cutting rates. The bank sees limited upside without fresh positive catalysts.

Q3: How do Hungarian rate cuts affect international investors?
Rate cuts can reduce returns on Hungarian bonds, making them less attractive to foreign investors. If the forint weakens, currency depreciation would further erode returns for non-HUF-based investors. However, the initial rally boosted returns for those who bought Hungarian assets earlier.