Hungarian Forint: How is euro adoption by 2032 reshaping the HUF outlook? – Commerzbank

Hungary’s risk premium could narrow over the coming years as the political stance shifts towards Euro adoption, according to Commerzbank’s Tatha Ghose. Prime Minister Peter Magyar’s explicit support makes joining the Euro by 2032 Commerzbank’s base case, a development Ghose regards as more significant than the latest rate decision. The MNB held its base rate at 5.50% and left the overnight corridor unchanged, although seasonally adjusted inflation indicates that real rates may soon become negative.

How Are MNB Policy and the Euro Path Shaping HUF?

"Hungary's National Bank (MNB) left its base rate unchanged at 5.50% yesterday and retained the 4.50%-6.50% overnight corridor. MNB cited high energy prices, rising global yields and financial-market uncertainty, while stressing that it will meet the new 2.5% inflation target within its policy horizon. MNB takes comfort from September inflation rate of 1.6%y/y and core inflation rate of 1.9%y/y."

"Of course, these year-on-year rates are misleading: our preferred seasonally-adjusted month-on-month indicators have re-accelerated in recent months and are now running faster than target. While the rate of core HICP increase did not accelerate in September (see chart on left below), that is only because core inflation may be slower to react to the price shocks which we are dealing with now. In any case, Hungary’s real interest rate, when calculated using month-on-month inflation, may soon dip into negative. This would hardly be consistent with MNB’s stated commitment to maintaining positive real rates, especially when inflation is forecast to accelerate towards 3.1% in 2027."

"The second, more consequential topic in yesterday’s news was about euro adoption. Prime Minister Peter Magyar’s explicit and unconditional support means that euro adoption by 2032 must now become our base-case for the forint outlook. After this timeframe, the forint exchange rate will cease to exist."

"All in all, Magyar provided a valuable signal to the markets: Euro adoption is frequently criticised as taking away crucial monetary policy freedom from a smaller country. Accepting such a compromise in exchange for deeper integration and potential stability via ECB backstop signals a decisive break from Orban-era unilateralism. This ideological convergence alone could narrow Hungary’s risk premium in coming years."

(An editor reviewed this article, which was prepared with the assistance of an Artificial Intelligence tool. Find out more.)