Forint eases, central bank seen pushing it even lower

BUDAPEST: The forint eased slightly on Tuesday, underperforming the Polish zloty, before a meeting of Hungary's central bank (NBH) which may announce new measures to ease monetary conditions.

The NBH, regarded as one of the most dovish central banks in the world, is expected to keep its base rate and overnight deposit rate on hold according to a Reuters poll of analysts.

But the bank, led by Gyorgy Matolcsy, a strong ally of Prime Minister Viktor Orban who is preparing to face an election, has

signalled it could take further measures to push long-term market interest rates lower.

The aim is to encourage commercial banks to boost mortgage lending at low fixed rates.

The rate decision is due at 1300 GMT.

Traders have already priced in new measures which could include a long-term fx swap tool, analysts said.

The forint traded steady at 312.41 against the euro at 0939 GMT, near the near seven-month low of 312.86 it reached last week.

"It is not moving now, but the central bank has often caused surprises and the market reaction to its announcements will be very interesting," one Budapest-based fixed income trader said.

The expected measures should not weaken the forint in the long term, but there were signs some investors could still try to push it lower on the day, the trader said.

"Even if it reaches the year's weakest levels beyond 314, that will not be lasting. I expect it to return to its current levels soon," a currency dealer said. Strong economic growth across the region and Hungary's big trade surplus support the forint.

The forint has shed 1.2 percent so far this year due to the NBH's loose policy.

The bank's liquidity injections and expectations of more easing have also helped Hungarian government bond yields fall to record lows in the past weeks, with their curve flattening.

"Our bullish conviction for 10y HGB (ten-year Hungarian bonds) remains intact although the bond yield already exhibited about 50-60 percent of the tightening potential," Raiffeisen analyst Gintaras Shlizhyus said in a note.

In contrast, Poland's zloty has firmed by more than 4 percent this year, buoyed by robust economic growth and expectations for central bank rate hikes.

Both the zloty and the Czech crown rose slightly on Tuesday, while the Romanian leu was flat.