European Rate Cuts Prove No Match for Mighty ECB

BUDAPEST—Some European countries outside the euro area are cutting interest rates, but that’s not weakening their currencies as it usually does.

Wednesday, it was the turn of Hungary, whose currency, the forint, hit a 14-month high against the euro despite a cut to record-low rates on the previous day. Earlier this month, Poland’s zloty also rallied against the euro after interest rates dropped by half a percentage point. Nordic countries have also been chopping interest rates with limited success in cooling their overly-strong currencies.

“It is somewhat counterintuitive but it highlights that central bankers are fighting a battle with the European Central Bank that they simply cannot win,” said Piotr Matys, a currencies analyst at BNP Paribas in London. “The stimulus that the ECB is providing in the form of quantitative easing is just too overwhelming.”

The ECB started a €60 billion-a-month bond-buying program this month to try and kick start a sluggish economy and boost inflation. That rammed the euro down against the dollar quickly in the program’s earliest weeks, although the common currency has since picked up against the buck.

But the euro has not bounced back against the forint or the zloty. That poses a challenge; overly strong currencies in small economies can dent exports and generate deflation by crimping import costs, a risk that Hungary’s central bank highlighted Tuesday.

In part, the Hungarian forint’s rally reflects some disappointment that the central bank did not opt for a larger cut. After keeping its rate-cutting cycle dormant since July last year, many economists had expected a slightly larger 0.2 percentage point reduction.

Hungary’s monetary easing cycle between August 2012 and July 2014 weakened the forint some 7.7% against the euro. Its “renewed monetary easing cycle may have a more muted impact on the exchange rate if at all given the ongoing quantitative easing by the ECB,” said Concorde Securities economist Janos Samu in Budapest.

Poland cut rates earlier this month in a bigger-than-expected 0.5 percentage-point step to 1.5%. The rate setters justified the decision with a significantly lower inflation outlook for the next two years amid stable economic expansion. Since then, the zloty has hit its highest point against the euro since January 2013.

Sweden has faced a similar challenge. Despite cutting rates last week to -0.1% and launching a small QE program in February, the krona has not weakened significantly against the euro. Last week the central bank unexpectedly cut rates again and boosted the scale of its bond buying plan, citing a desire to weaken the currency.

Denmark, meanwhile, has cut interest rates four times this year to try and weaken the krone enough to keep the currency’s peg against the euro in check.