23 February 2009

Since the beginning of this year, the currencies of CEE countries, including the Czech koruna, the Hungarian forint, the Polish zloty and the Romanian lei depreciated substantially vis-a-vis the euro.

As potential causes of this regional depreciation high current account deficits, export-dependent economies facing a sharply falling demand from Europe and a strong dependence of local banks on foreign funding may be mentioned.

In normal times there is nothing wrong with a catching-up economy running a current account deficit. Export-oriented economic structures and close financial integration with an advanced region like Western Europe are normally taken as advantages and not as potential dangers.

However, these are far from normal times. As global deleveraging continues, financing external deficits has become more difficult for small European catching-up economies. This makes some adjustment, including that of the exchange rate, necessary. Meanwhile, in Western Europe, our major export market, monetary and fiscal stimulus has been deployed and hopefully more is in the pipeline. Ultimately, this will help support export demand for the Central Eastern European countries. The fiscal adjustment has a significant impact on the reduction of the external financing needs of the country. Quick action by European policymakers helped to stabilise the financial system in Western Europe. With their liquidity and capital situation significantly improved, Western European parent banks remain committed to their subsidiaries in the region. In addition to  verbal commitments, this can be seen in the continued cross-border flows from the parent banks to their CEE subsidiaries.

While some exchange rate adjustment is indeed appropriate in these economies, excessive depreciation which is not justified by economic fundamentals can be disruptive and should be avoided. The Hungarian central bank is ready to take action if necessary to prevent disruptive movements in the forint’s exchange rate.

Magyar Nemzeti Bank