MNB responds to forint sell-off

The Hungarian National Bank said it is prepared to use all the policy tools available to defend the forint, which came under pressure on foreign exchange markets last week.

In a statement released after two extraordinary meetings were held over the weekend, the central bank's monetary council said that the depreciation of the forint had gathered pace in recent weeks, a development the council "believes to have been caused mainly by a departure of expectations from economic fundamentals."

A reduction in global willingness to take risk as well as a deterioration in sentiment towards economies of the Central and Eastern European region, and the Hungarian economy in particular, had also contributed to this, the central bank added.

On Friday Hungary's currency slumped to 318 to the euro, having started the year at 265. In summer 2008 the rate touched a high of 228 to the euro.

The central bank said it would encourage banks to increase their recourse to its forint and foreign currency liquidity-providing instruments introduced recently, and will soon be converting EU funds in the market. The central bank "stands ready to use the full range of monetary policy instruments at its disposal," it said (italics in original).

On Monday morning, the central bank allocated a total of €224m in three- and six-month swaps. In markets on Monday the forint recovered somewhat from Friday's sell-off to trade within a range of 307 to 312 to the euro.