Fragile forint forces Hungary's central bank to pause rate cuts
Base rate steady at 6.5%, as expected
Hungary runs EU's highest key rate alongside Romania
Volatile forint trading near 18-month lows
Bank concerned about currency impact on prices
Adds central bank comments, updates forint
By Gergely Szakacs and Krisztina Than
BUDAPEST, Oct 22 (Reuters) -Hungary's central bank paused interest rate cuts at 6.5% on Tuesday, as expected, as falls in the forint EURHUF= raised concerns about a rebound in price growth despite inflation hitting the bank's 3% target for the first time since 2021.
Even after cuts totalling 11.5 percentage points since May 2023, Hungary's benchmark interest rate is the highest in the European Union, with the National Bank of Hungary (NBH) now headed for what could be an extended pause in rate cuts.
The bank said in a statement that "re-intensifying geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant a pause in cutting interest rates".
Deputy Governor Csaba Kandracs told a briefing the base rate could remain at its current level for a prolonged period.
"If the external environment and the inflation outlook make this necessary, the base rate could remain at the current level for a prolonged period, leading to an increase in our relative interest rate spread," Kandracs said.
The NBH also said it would closely monitor the FX swap market towards the end of the year and was ready "to smooth movements in financial markets by using instruments with longer maturities in December" in addition to its one-day FX swap tenders on a daily basis and weekly discount bill auctions.
The forint has fallen nearly 7% versus the euro since the NBH started easing and plumbed 18-month lows past the psychological 400 mark this month, pressured by an escalation of the Middle East conflict and a shift in the U.S. rate outlook.
MEDIAN FORECAST
Tuesday's decision was in line with the median forecast of 13 economists in a Reuters poll. At 1320 GMT, the forint, which has fallen 4.5% versus the euro this year alone, traded at 400.30 per euro, after briefly firming past 400 right after the rate announcement.
"This was de facto pre-committed by monetary policy in-charge, Deputy Governor Barnabas Virag, last week by way of verbal intervention to stabilise the HUF exchange rate," Commerzbank economist Tatha Ghose said in a note.
"Price action suggests that sentiment on HUF is the most negative among peers, hence while we could see EUR-HUF trending lower gradually, this may not happen immediately, especially as the euro is also correcting lower."
Repeated verbal interventions by Virag, with the latest coming less than a week ahead of Tuesday's rate meeting when the bank usually refrains from commenting on policy, have failed to bolster the forint significantly.
Virag said last week the base rate could remain at its current level, the EU's highest alongside Romania, for a longer time if warranted by external risks and the inflation outlook.
Although September inflation fell to the central bank's 3% target for the first time since 2021, the NBH is concerned over what it now sees as a stronger link between the weakness of the currency and stronger inflationary pressures.
Reporting by Gergely Szakacs and Krisztina Than, editing by Ed Osmond
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