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The forint reversed declines against the euro after Hungary’s central bank signaled it expects elevated levels of surplus liquidity in the economy to abate.

The currency rose 0.1% to 332.31 per euro by 12:30 p.m. in Budapest after declines of as much as 0.2% earlier in the day. A pick-up in seasonally low government cash reserves via bond sales will likely soak up excess cash, Deputy Governor Marton Nagy said.

“We don’t think there is so much of a problem with this high liquidity because we think it will disappear in the next quarter if the government absorbs the liquidity on the market,” Nagy told reporters on the sidelines of a Euromoney conference in Vienna on Wednesday.

In question are the central bank’s foreign-currency swap operations, an unconventional tool policy makers use to steer surplus liquidity in the economy and influence interbank rates. Measured as the sum of net overnight deposits and excess reserves, the surplus has hovered near 1 trillion forint since the end of December, double the “at least 300 billion-500 billion forint” central bank target for the first three months of the year.

The cash abundance has put pressure on the forint in the last week, with upside surprises in inflation across eastern Europe making some investors question the sustainability of loose financing conditions in Hungary.

Nagy said an acceleration in headline inflation last month to 4%, the top of rate setters’ tolerance range, was in line with forecasts that predict a slowdown toward a 3% target from the second quarter. The central bank didn’t need to react to the data, he said.

To contact the reporters on this story: Radoslav Tomek in Bratislava at rtomek@bloomberg.net;Marton Eder in Budapest at meder4@bloomberg.net

To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Michael Winfrey, Andrea Dudik

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