Pleschinger: Hungary financially stable, risks remain

Gyula Pleschinger, one of the two external members of the Monetary Council of the National Bank of Hungary (MNB) who both voted to keep interest rates on hold in February when the majority of the nine-member council backed a 15 bp cut to 2.70%, said that caution was warranted due to Hungary’s heavy reliance on foreign funding.

“As for the minority view ... we believe that our vulnerability is increasing, so risks are on the rise,” Pleschinger was quoted as saying, noting that this was also manifested in higher government bond yields.

“And if we look at what happened with relation to the Ukrainian crisis, it’s visible that the forint reacts more vehemently to various external market developments than the region’s other currencies or most emerging currencies,” he said.

He cited OTP Bank’s subsidiary and gas imports as Hungary’s main exposure to neighboring Ukraine.

Pleschinger said that a current account surplus and Hungary’s strong financing ability supported the forint, but heavy reliance on foreign funding – with 62% of state debt held by foreigners – made Hungary particularly vulnerable to any potential negative shift in sentiment.

“When a shift comes, it could come very fast, and then we could be forced to take very sudden action,” he said.

Stressing that the bank had no exchange rate target, Pleschinger said that “we normally don’t talk about the exchange rate... The main aspect is inflation, and the exchange rate to the extent it impacts inflation. And based on current calculations, the current exchange rate poses no threat to the medium-term inflation goals, and for the time being it does not pose a threat to financial stability either.”

The condensed minutes of the February rate-setting meeting show that the two external members of the council argued that the volatility of the forint’s exchange rate, the steepness of the yield curve and rises in short-term yields showed the easing cycle had reached its bottom.

However, the other members said inflation and real economic developments “were consistent with a further easing of policy,” adding that “strong economic fundamentals clearly distinguished Hungary from those emerging market economies which had been faced with financial market turbulence recently.”