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The forint fell to a record low against the Polish zloty as concerns grew over the independence of Hungary's central bank, while Warsaw's improved relationship with the European Union freed up tens of billions of euros in funds.
The two central European countries have been on markedly different paths in recent months. Hungary has been bogged down in disputes with international partners such as the European Union and other members of the North Atlantic Treaty Organization (NATO) while tensions have risen between the government and the central bank. Meanwhile, the European Commission has begun releasing Poland from frozen EU funds worth €137 billion after recently deciding that Warsaw had made “decisive” efforts to restore the rule of law.
The forint has fallen by 6 percent against the zloty over the past six months to an all-time low. The selling gained momentum this week after Hungary accelerated the pace of interest rate cuts. This came just one day after the European Central Bank called on Budapest to respect the independence of the country's central bank.
The interest rate reduction narrowed the gap between the two countries' borrowing costs. Hungary's key interest rate fell by one percentage point to 9 percent this week, after falling from 13 percent in the fall. Meanwhile, interest rates in Poland have remained at 5.75 percent since parliamentary elections in October that returned former European Council President Donald Tusk to office.
“The interest rate advantage of the forint [over the euro] “The zloty is fading while the zloty’s interest rate advantage is holding steady,” said Peter Verovac, an analyst at ING in Budapest.
Tensions rose in the Hungarian capital on Thursday after central bank governor György Matolcsi said Viktor Orbán's government was planning a “major attack” against the bank's independence and that the prime minister's policy of boosting the economy through stimulus was “doomed to failure.”
Orban's government, which has called for much faster interest rate cuts to help boost anemic economic growth, has proposed a draft law that would allow it to impose tighter controls on central bank operations, but not on monetary policy. Increasing hostilities between Matolcsi and members of Orbán's government also contributed to a view among many investors that the central bank was being targeted by influence attempts by the government.
Meanwhile, in Poland, the central bank has been reluctant to cut interest rates, with analysts expecting the next cut to come in the third or fourth quarter of this year – if it happens at all. Policymakers have shifted their focus towards medium-term inflation risks, highlighting threats from a tight labor market, strong wage growth, and expansionary fiscal policy.
The zloty was one of the world's best-performing major currencies over the past year, rising by 9.5 percent against the dollar. The forint was among the 10 worst currencies, down 3.9 percent.
“Spreads are a key factor driving divergence between currencies, and central bank independence is at risk in Hungary,” said Piotr Matthys, foreign exchange analyst at Intouch Capital. “At the same time, there are EU funds that will flow to Poland, while Hungary still needs to do more to gain full access to EU funds.”
As Poland begins receiving billions of euros from the bloc, markets expect at least some of the funds released from Brussels to be converted into zlotys, providing additional support for the currency.
While the EU released 10 billion euros to Hungary late last year, Budapest faces “no such possibility” of a full release of European funds, according to ING's Verovac. Any funds released to Hungary are delivered in euros, and are usually kept there, providing little support for the forint.
Murat Toprak, foreign exchange strategist at HSBC, said the divergent political and economic motivations in the two Central European countries helped make their currencies “one of the most widely traded relative value currency pairs.”
