EN
Interest rates on the Hungarian forint are higher than interest rates in the Euro area or other countries in the region. Interest-rate decisions are based on assessing several factors in monetary policy. This paper evaluates the effects of a sizable interest-rate differential between Hungary and the Euro area on the exchange rate and on its volatility. There is a difference in the effects of the interest-rate differential on the exchange rate in the short run and in the long run, but a higher interest-rate differential tends to increase exchange-rate volatility on both horizons. There is a triangular relation between interest-rate differential, speculative capital flows, and exchange-rate volatility. Any angle in this triangular relation points to the importance of the financial-stability consideration in forming monetary policy.