UPDATE 4-Hungarian forint regains some ground after central bank flags base rate hike

·4 min read

* Cbank raises 1-week deposit rate by 200 bps to 9.75%

* Hungary's forint ditched in negative risk sentiment

* Widening C/A deficit, lack of EU funds access weighs

* Govt makes concessions to Brussels in EU funds talks- PM aide

* Cbank flags possible hike in base rate for July 12 (Recasts with central bank statement)

By Krisztina Than and Anita Komuves

BUDAPEST, July 7 (Reuters) - Hungary's central bank raised its one-week deposit rate by a whopping 200 bps to 9.75% on Thursday and the government pledged to rein in the budget deficit in a bid to shore up the forint after it plunged to record lows this week.

Reviving the currency is a major challenge for Prime Minister Viktor Orban's government as Hungary's twin deficits and lack of access to EU funds prompt investors to sell the forint amid worsening sentiment on international markets.

Fears of a Europe-wide recession and the prospect of a deepening energy crisis have contributed to the forint's falls.

The National Bank of Hungary said in a statement that its 200 bps hike was aimed at avoiding the risk of high inflation persisting longer due to the situation in financial markets, and flagged a possible base rate hike for July 12. The rise in the one-week deposit rate "should be built into the base-rate tightening cycle as early as possible," the bank said.

"The fast closing of the gap between the base rate (currently at 7.75%) and the one-week deposit rate will be discussed at the Monetary Council's next meeting on 12 July," the bank said, adding it would also hold an fx swap tender providing foreign currency liquidity on Friday.

"By maintaining an active presence in the market, the NBH enhances the effectiveness of monetary policy transmission, thereby supporting the achievement and maintenance of price stability."

The forint firmed to 405 from 410 after the comments, moving away from its all-time low of 416.90 hit on Wednesday.

Peter Virovacz, an analyst at ING, said Hungary's current account deficit, coupled with a lack of agreement on the release of frozen EU funds highlighted the country's worsening risk profile.

This has led to a decoupling of the forint from its peers in Central Europe - with the forint depreciating about 9% this year, while the Polish zloty has eased just 4%.

In an effort to talk up the forint, Orban's chief of staff told a briefing the government was committed to reaching its budget deficit targets this year and next, and aims to close talks with the European Commission about the release of EU funds as soon as possible.

Gergely Gulyas said talks have progressed as Hungary made concessions on four issues but a deal would likely come only in the autumn.

"What we can do is we stick to our planned budget deficit target," he said when asked about the forint's plunge, adding that Hungary -- which is predominantly reliant on Russian gas -- would also strive to diversify its energy imports.

VULNERABILITIES

The forint has been on a weakening trajectory for weeks, complicating the central bank's efforts to curb double-digit inflation and exposing Hungarian assets to any negative shift in sentiment caused by the war in neighbouring Ukraine and surging energy costs.

Hungary's current account deficit is expected to widen to 5.6%-6.6% of GDP this year, compared with 2.2%/GDP in the Czech Republic and a deficit of 1.5% of GDP in Poland. Hungary's public debt level is around 77% - far higher than 42% of GDP in the Czech economy and about 56% in Poland.

On Friday, Hungary will publish June inflation figures that are expected to show a rise in annual inflation to 11.5% despite government-imposed price caps on fuels, energy bills and basic foodstuffs. The central bank expects inflation to peak in the autumn, but a weak forint poses additional inflation risks.

Although the economy is still propelled by strong domestic demand, rising inflation and borrowing costs are expected to lead to a slowdown next year.

Hungarian bond yields have also jumped this week, with the 10-year yield at around 8.80% but traders and analysts said investors held onto forint-denominated government bonds.

A Reuters poll showed on Wednesday that the forint could gradually recover in the next year, if EU funds start flowing in and inflation slows and external risks subside. (Reporting by Krisztina Than and Anita Komuves; Editing by Toby Chopra, Barbara Lewis, Carmel Crimmins, Alexandra Hudson)

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