Honduran Lempira To Depreciate As Central Bank Continues To Loosen Monetary Policy

• Fitch Solutions forecasts that the Honduran lempira (HNL) will average HNL24.77/USD in 2020, down slightly from its average of HNL24.74/USD in the year through August 31.
• It is expected that the lempira will weaken in the coming months as the Banco Central de Honduras (BCH) lowers its benchmark monetary policy rate, in an effort to support the supply of credit to households and business during Honduras’ sharp COVID-induced recession. The BCH’s easing will narrow the interest rate differential between Honduras and developed markets, weakening the appeal of Honduran assets.
• Fitch solutions except for the value of the lempira to continue declining in the long-term, averaging HNL25.5/USD in 2021 as the BCH further reduces its participation in FX markets, while monetary policy remains loose and the continued spread of Covid-19 undermines the outlook for the Honduran economy.
• As part of its 2019 agreement with the IMF, the BCH is increasingly allowing market forces to determine the value of the lempira. At the same time, it is expected that the BCH will hold its benchmark policy rate steady at 3.25% through end-2021 in order to boost economic activity.

(Source: Fitch Solutions)