KBC Flash

Hungary moves to free−floating FX to fight inflation

Wed, Feb 27 2008, 08:16 GMT
by KBC Market Research Desk

KBC Bank


  • • The National Bank of Hungary (NBH) and the government decided to scrap the forint’s trading band and adopt a free-float exchange rate regime in order to focus solely on meeting the medium-term inflation target of 3%
  • • The inflation outlook contains significant upside risks to the 2009 inflation target and the central bank may have to hike rates to counterbalance these risks, but the forint and bonds may perform well if this strategy becomes credible

The Hungarian government agreed with the central bank to abandon the fluctuation band of the forint on 26 February 2008. The timing of the decision was a surprise for markets as the government didn’t support the idea before. The decisive factor could have been the risk/need of rate hike(s) as inflation has become a major concern for economic policy and as the credibility of the 3% inflation target was at stake.

The conflicting dual inflation and exchange rate targets have been mentioned by many observers as a possible source of instability. The IMF, economic think tanks and many economists argued in recent years that Hungary would be able to achieve low inflation easier without the band.
The band was introduced as part of the Bokros Austerity package in 1995 and was widened to +/-15% in 2001, when the central bank adopted the inflation targeting framework.

Low credibility of the inflation target

Inflation has accelerated to above 7% since last autumn, in line with the trend of other CE4 countries. However, there have been signs that inflation has not just risen on one-off shocks, like food, fuel or regulated prices, but that also services and tradable goods showed some acceleration in recent months. The underperformance of the forint and of the long end of the local government bond curve were a signal that markets feared the inflation shock was not just temporary, but that part of that could become a permanent development.

Published on  Wed, Feb 27 2008, 08:24 GMT

Archive

KBC Bank  | Havenlaan 12, 1080 Brussels
http://www.kbc.be/dealingroom | piet.lammens@kbc.be

Legal disclaimer and risk disclosure

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

Interested in forex trading? forex brokerage firms!


MF Global UK Limited
Contact the broker/FDM
Open a demo account		GFT
Contact the broker/FDM
Open a demo account
GFX Group SA
Contact the broker/FDM
Open a demo account		Alpari (US), LLC
Contact the broker/FDM
Open a demo account		ACM USA LLC
Contact the broker/FDM
Open a demo account

FXstreet.com will give you a 3 months membership as soon as minimum rebates have been generated (€150 for private trader/ €300 for corporate trader)

[Read Premium full description]


Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer.

Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management.

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

©2008 "FXstreet.com. The Forex Market" All Rights Reserved.