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Hungary became the first country to have a panic interest rate hike -- a full 3 percent -- in the current global economic crisis.

Hungary’s central bank raised its benchmark interest rate a full 3 percent Oct. 22 in a move to prevent capital flight and to shore up confidence in its currency, the forint. The move might end up triggering a contagion effect among other Central European and Balkan states in similar, highly illiquid positions.

The move by the Magyar Nemzeti Bank to raise its two-week deposit rate to 11.5 percent was intended to defend against capital flight by investors fleeing to safer economic conditions. Raising interest rates is intended to help keep capital in the country by making lending more profitable for banks and investors since returns are higher. The downside, however, is that higher rates act as a brake on the economy, with fewer and fewer people seeking credit as a result of the increase in borrowing costs. Hungary’s forint has experienced a rapid depreciation relative to the euro — losing 14 percent this month alone — during the current global economic crisis, and has become one of the worst emerging-market currencies this year.

The move also comes days after Hungarian officials negotiated a 5 billion euro (US$6.7 billion) bailout package with the European Central Bank (ECB) to inject scarce liquidity into the country’s financial sector.