BUDAPEST: The forint surged to a two-month high against the euro on Tuesday after Hungary's central bank surprised investors by announcing the end of its latest rate-cutting cycle.
The move could herald the end of years of monetary easing in the European Union's emerging economies.
The Hungarian central bank closed the easing cycle with a 15 basis-point reduction in its base rate to 1.35 percent.
The cut was bigger than analysts' 10 basis-point consensus forecast, but the forint firmed as the bank's Governor Gyorgy Matolcsy said interest rates would remain at the current record low levels for a long time.
"So even if the US Federal Reserve hikes rates (late this year as expected), Hungary will not hike its own rates," one Budapest-based currency dealer said. "People ignore that right now and the forint is being bought in brisk trade."
The forint touched a two-month high at 307 against the euro, to give up some of the gains later. It traded at 307.69 at 1335 GMT, firmer by 0.8 percent from Monday.
Faster economic growth in Central Europe than in the euro zone is buoying the region's currencies now that risk aversion has subsided after debt-laden Greece reached a deal with its creditors.
Junk-rated Hungary's main interest rate is now lower than much better rated Poland's. But ratings agencies are generally expected to upgrade Hungary in the next year, and political uncertainty around Poland's October elections may weigh on the zloty.
"I cannot foresee any factors that could weaken the forint in the short term," the dealer said.
The zloty gained 0.2 percent.
The Czech crown reversed its early easing and firmed slightly as well, even though the central bank surprised late in the previous session by saying it sold the currency on Friday.
It was the first intervention since late 2013, when the central bank launched its weak-crown regime pledging to "prevent excessive appreciation of the crown exchange rate below 27 the euro" to fight deflation and help the economy.
Analysts said investors were likely to maintain pressure to strengthen the crown.
"(We) expect to see more volatility and 'events' near the official floor," Commerzbank analysts said in a note.
The crown's strength indicates that investors are reassessing the risk that the bank (CNB) will exit the weak crown cap earlier than expected, RBS analysts said in a note.
"Yet, we believe the CNB will retain its FX commitment until at least 2H (the second half of) 2016, in line with the central bank's comments," they added.
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