Pity Hungary’s central bank. If ever there was a country that needed an interest rate cut, here it is.  With the euro zone in the doldrums, the Hungarian economy is taking a big hit, with April-June growth coming in at a measly 1.5 percent on an annual basis, well below expectations. Quarter-on-quarter growth was in fact zero. Data last week showed annual inflation at two-year lows last month. Despite a cut to personal income tax rates this year, household consumption is stagnating. Unemployment is running at 11 percent. 

Yet the central bank’s hands are tied. A rate cut would weaken the forint currency and that would hurt the Hungarian families, municipalities and companies that are struggling with tens of billions of dollars in Swiss franc-denominated loans. The surging franc has already lopped half a percent off  Hungarian growth this year as families cut back on consumption to keep up loan repayments, Nomura analysts calculate. Another reason Hungary cannot really afford a weaker forint at this stage is its dependance on imports — they make up some 75 percent of GDP, far higher than in neighbouring Poland, says Neil Shearing at Capital Economics

Bond markets are betting on a rate cut — swaps are pricing in a half point cut over the next year. But will the central bank bite the bullet any time soon? ING Bank analysts think not. Hungary could need the protection of high interest rates in event of a global market selloff, they note. Hence the bank can afford to cut rates only next year. Shearing of Capital Economics agrees: “The central bank is in a bind. Provided the euro zone doesn’t melt down, there could be room for one or two rate cuts next year but at the moment its hands are tied by the currency issue.”

Things could get worse. With the economic slowdown  blowing a hole in the state budget, the deficit-cutting government may announce more austerity measures. All bets on a near-term growth uptick would seem to be off.