(Recasts with fresh analyst comments, weakening forint)
BUDAPEST, Sept 24 (Reuters) – Hungary’s central bank unexpectedly raised the interest rate on its one-week deposit tool by 15 basis points to 0.75% on Thursday, but the surprise hike failed to give a substantial boost to the weakening forint.
Governor Gyorgy Matolcsy, an ally of Prime Minister Viktor Orban, is facing the toughest challenge of his seven years in charge at the National Bank of Hungary (NBH) as economy has plunged into a deep recession while inflation is rising. The forint’s recent losses meanwhile pose further inflation risks down the line.
The central bank, which last used the one-week deposit rate to support the currency on April 1, when it plunged to all-time lows of near 370 versus the euro during the first wave of the coronavirus pandemic, said the hike was aimed at preventing a rise in inflation risks amid uncertainty in global markets.
Analysts said the bank would probably need to hike the one-week deposit rate further to support the currency. The NBH sets the rate at a tender each Thursday, which allows it to manage liquidity in the banking system and influence short-term rates.
By 1333 GMT the forint was trading at 363.95 versus the euro, easing from 363.50 hit after the rate increase. Earlier, the currency touched a low of 366.41.
“If the Forint stabilises, the NBH will keep the 1-week deposit rate higher, but refrain from changing the official policy rate,” Goldman Sachs analysts said in a note.
“However, if the currency remains under pressure the NBH may hike the 1-week deposit rate further and eventually bring the official rate higher as well.”
The deposit rate hike came two days after the central bank kept all of its main interest rates unchanged at a regular meeting. The benchmark base rate stands at 0.6%.
The central bank said on Thursday it was committed to maintaining price stability.
“The NBH wants to prevent a rise in inflation risks due to the current uncertain environment, and thus decided to raise the rate on the one-week deposit,” it said in a reply to questions.
The forint has been weakening and has underperformed other currencies in Central Europe as the second wave of the coronavirus pandemic undermines expectations for a fast economic recovery in Hungary.
A global deterioration in sentiment has also made emerging currencies vulnerable. The central bank said earlier on Thursday that it had no exchange rate target.
“There was a knee-jerk reaction in the forint,” said Peter Virovacz, an analyst at ING.
“I do not think that this move would be enough. If the forint makes the central bank uneasy with regard to inflation developments, then they may need to raise the deposit rate again next week.” (Additional reporting by Anita Komuves; Editing by Hugh Lawson and Catherine Evans)