Rate Decision - MNB Delivers More, Speaks Softly

The MNB has decided today to increase the O/N deposit rate from -0.15% to -0.05% at its regular interest rate setting meeting, leaving other rates unchanged. The decision is broadly in line with expectations and the indication of the central bank.

The MNB has taken a step further, and decided that the interbank liquidity be tightened by HUF 100 billion (crowding out 300-500 billion to the interbank market from the central bank balance sheet as of Q2 vs HUF 400-600 billion in Q1). 

The MNB will make sure that the 10bps increase that happened in the O/N deposit rate will be passed through to the interbank Bubor rates on the 1-3 month horizon. This is thus a de facto base rate increase by the central bank. The tool for achieving such an outcome is by manipulating interbank liquidity conditions via fx swaps.

As regards the outlook for monetary policy, the re-appointed governor stressed that the monetary policy would keep being loose (somewhat in contrast to the press release) , with changing tools. Also, the MNB has referred to the easing stance by major central banks in recent weeks, justifying a cautious approach on their behalf.

The MNB dropped the reference to the stance of monetary policy and stressed its cautiousness - data dependency, based on the evaluation of developments in the quarterly inflation reports. This indicates that major decisions would come on meetings accompanied with an inflation report (June the next).

Stressing data-dependency, the governor said today’s measures should not be interpreted as a beginning of a new cycle, this was a one-time decision, the monetary policy will remain loose.

 
A new, modest program, aimed at supporting the development of corporate bond market has been launched, with a HUF 300 billion limit. The new program's liquidity effects will be sterilized by a preferential deposit.

All in all, the Monetary Council delivered more than had been expected by the market, yet the easy tone of the governor’s communication took the wind off of the market players positioning for interest rate increases – the FRA market indicated following the decision a 20bps drop in expected yield increases over the course of the year.

We believe that the MNB tried to deliver amidst earlier indications by them pointing to ‘normalization’ of monetary policy, yet tried to prevent a strengthening speculation on the fx market wit too strong forward guidance. The governor’s recurring reference to the 3% inflation goal has, however, toned down his dovish comments.

It seems likely that the MNB tries to strike a delicate balance between the need for some tightening and providing a reason for a strengthening speculation in the forint market. 

Given the inflation outlook, we see it likely that the MNB will try to navigate the fx rate by verbal intervention, and postpone further interest rate decisions well into Q4, when the stance of the ECB policy will be much clearer. It thus remains our base scenario that the EURHUF could find its new trading range in the previous range of 308-318

 

 

 

 

Hai Thanh Le Phuong, CFA
Head of Research

CONCORDE SECURITIES LTD.

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