BUDAPEST, July 6 (Reuters) - Hungary's central bank will on Thursday hike its one-week deposit rate as the financial market situation poses a clear threat to price stability, its deputy governor said after the forint plunged to record lows.
The forint slid on Wednesday and Hungarian government bond yields jumped as the country's worsened risk profile and worries over the future of EU fund flows added to recession fears.
Barnabas Virag said the market situation of recent days had increased inflation risks.
"The NBH (central bank) tomorrow will react decisively by raising its one-week deposit rate," the deputy governor said in an emailed reply to Reuters questions.
"The central bank continuously stands ready to use all its tools to intervene in order to ensure price stability."
The deposit rate stands at 7.75%, and on Thursday the bank will hold a weekly tender.
The forint was 2% weaker, falling to new record lows against the euro past 416 by 1413 GMT. It regained some ground after Virag's comments, to 411.50.
The forint has been on a weakening trajectory for weeks, complicating the central bank's efforts to curb double-digit inflation and exposing Hungarian assets to any negative shift in sentiment amid the war in neighbouring Ukraine and surging energy costs.
Hungary's vulnerabilities have increased this year. Its current account gap has widened mostly due to its high energy imports bill at a time when the government has only just started to rein in a huge budget deficit, after a spending spree which that helped Prime Minister Viktor Orban to a landslide victory in elections in April.
Markets have awaited an agreement over the release of billions of euros of EU funds frozen due to concerns in Brussels over corruption, judicial independence and the rule of law inside Hungary.
The deal has not yet been signed, and this has weighed on local assets.
(Reporting by Krisztina Than; Editing by Jon Boyle and John Stonestreet)
