Hungary forint posts worst EM losses after GDP forecast cut

Hungary forint posts worst EM losses after GDP forecast cut

Hungary's forint has experienced significant depreciation, posting the worst performance among emerging markets (EM) currencies. This decline comes amidst a contraction in the country's gross domestic product (GDP) and a forecasted reduction in economic growth for 2025. The Hungarian National Bank (MNB) kept its benchmark interest rate at 6.5%, the highest in the European Union, tied with Romania, to combat rising inflation.

The MNB's decision to maintain the key rate reflects its concern over upward-pointing inflation risks, despite a deteriorating economic outlook. Inflation accelerated to 4.6% in June, breaching the central bank's tolerance band of 4%, and is forecasted to average 4.7% this year. The forint has gained 3.1% this year, the best performance in EM after the Russian ruble, despite the hawkish monetary policy.

However, the economic outlook remains bleak. The GDP contracted in the first quarter of 2025, and the MNB forecasts 0.8% annual economic growth for the year. Policymakers may reduce interest rates toward the end of the year, with forward-rate agreements suggesting around 36 basis points in cuts in six months.

In the broader context, several significant global events could impact FX and bond markets in the coming week. The U.S. PMI data, ECB decision, and Japan's Upper House elections are among the key events to watch. The ECB is widely expected to leave its policy rates on hold, while Japan's elections could unseat Prime Minister Ishiba and delay trade talks with the U.S.

The forint's depreciation underscores the challenges faced by Hungary's economy, driven by a combination of high inflation and a contraction in GDP. As the MNB continues to navigate these challenges, investors should keep a close eye on economic indicators and policy decisions.

References:
[1] https://www.bloomberg.com/news/articles/2025-07-22/hungary-holds-key-rate-steady-for-10th-month-to-anchor-inflation
[2] https://www.marketscreener.com/news/week-ahead-for-fx-bonds-focus-on-u-s-pmi-ecb-decision-japan-elections-ce7c5cdfdf8dfe22