The surge in energy prices this year has led to a sharp widening in Hungary’s current account deficit and increased its dependence on foreign capital inflows. While the central bank seems to have put a floor under the currency recently, it remains highly vulnerable to a deterioration in investor risk appetite. A further fall in the currency would push up FX debt servicing costs and add to already intense inflation pressures, which we think may force the central bank to raise interest rates further in the coming months.
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