Hungarian central bank, Magyar Nemzeti Bank (MNB), will probably find it necessary to bring an end to the limits of the euro/forint rate maximum change (which is at 15% currently) after country’s inflation report for November showed 7.1% growth, while the target inflation rate is just 3.0%.
Tamas Vojnits, the analyst of OTP Bank, stated that the only way Hungarian government can successfully fight the inflation at its current rate is the free floating of the national currency, and that MNB soon will have to accept this step. Current 7.5% interest rate, while still the highest in European Union, fail the task of keeping the inflation low.
Giving the forint a completely free exchange market float will grant the central bank another useful monetary tool to slow the inflation – national currency appreciation. With a 3.5% interest rates difference against the euro, forint’s value growth against European currency (and with it, a majority of world currencies too) will be accelerated by the carry trade operations.
Of course, this question still remains a speculation – central bank may still use some other, even more radical, methods to counter the inflation. But the abandonment of the trading bands, at least temporary, is one of the least dangerous and most effective ways to do it.
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