The forint is a bit too weak, though not dramatically

HUNGARY - In Brief 23 Nov 2021 by Istvan Racz

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The current EURHUF 371 exchange rate is a bit too weak from the MNB's point of view.The press keeps stressing that the forint has weakened to its historical record low. This does not mean a lot, of course, but somehow the press tends to be in love with records. A more reasonable way of assessment is to take a look at the yoy change of the EURHUF rate, to see if the current exchange rate is adding to domestic inflation or holding it back.From this point of view, the crucial fact is that EURHUF 371, if sustained, would imply a 3-3.3% yoy euro appreciation against the forint in each of the next three months. This is lower than current CPI-inflation and much lower than current producer prices inflation or the rate of increase of production costs (wages, materials mainly).In this sense, the current exchange rate could be even contractionary, but it actually is not, as what it should measure is the development of relative prices. And inflation is also high in trading partner economies, and the inflation differential is quite small, typically smaller than the pace of the forint's current rate of depreciation. Consequently, the forint should be regarded as moderately weak in a fundamental analysis.Surely, the domestic layman's thinking is very different. It focuses on the requirement of nominal currency stability. If the forint is depreciating by any little in nominal terms, it is widely considered as inflationary, or highly inflationary, in the eyes of (most of) the maybe 3 million domestic citizens who have any vague hint on what the EURHUF exchange rate may stand for. Similarly, if the MNB raises interest rates, it tells the ordinary man/woman of the street that inflation i...