The Hungarian central bank raised rates 3 percent to 11.5% in an effort to stem the currency slide in the forint. This is a classic play to punish speculators through making it more expensive to hold the currency. The real rate is now above 6% and may rise further on falling inflation. These central bank activities usually do not work even though the immediate reaction has been a strong appreciation of the currency.
What makes this different from Iceland is that the poor economic situation is better known and we are in the middle of a credit crisis cross Europe. Higher rates may not be enough to attract capital.
The situation is poor in Hungary where growth will be curtailed to save the currency. The debt structure has too much focus on the foreign currency loans. This rise came after the ECB provided a 5 billion euro loan. The IMF may also have to step in. The biggest concern should be the potential for contagion to the other emerging market countries of Eastern Europe.
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