Rate Decision - MNB Signals Data-Dependency

 

The MNB left interest rates unchanged at its regular interest rate setting meeting today, and left intact its other tools as well.

Also, the MNB has reiterated that they are ready to cautiously and gradually normalize their monetary policy. That said, they stressed the importance of incoming data, meaning that the monetary policy is set to be made in a data-dependent mode.

The press release following the meeting stressed again the volatility in the headline and the continuous rise in the underlying inflation pressure. The MNB made it clear that the evolution of core inflation pressure net of taxes has the most important impact on the evolution of the MNB’s monetary policy, the evolution of the ECB monetary policy being only of secondary importance.

While forecasting a further rise in the core inflation net of taxes in coming quarters, they retained the right to assess these developments implication on the sustainable achievement of the inflation target.

The MNB reiterated its preference of a change in the non-conventional measures first during the early phase of a future tightening.

We think the MNB could see more reasons in the coming months’ inflation data that could support a next step in monetary policy ‘normalization’ in its coming meetings.

We think the first amendment to their policy could be a re-widening of the currently tight interest rate corridor and lifting its lower bound from -0.15% to non-negative territory.

Given the MNB’s stated preference to take steps in a quarterly manner, we expect one such decision to take place during the March meeting, the earliest, when the MNB comes out with a new inflation report.

Further steps of monetary normalization could include the tightening of liquidity conditions in the interbank market – a decision that could partly happen through weekly swap auctions as well as predetermined targets for ‘liquidity crowding out’, as they call this tool (the central bank decides about the optimal size of the liquidity on the interbank market on a quarterly basis).

At the same time it is interesting to note that the MNB has kept its interbank liquidity-adjusting swap tools’ size unchanged for months now.

All in all, the experienced buildup of inflation pressures in recent months, and the central bank’s hints at inflation outlook-dependent normalization implies to us that they are considering one such move in the near future.

The current press release has reaffirmed the deputy governor’s recent pro-forint / hawkish comments without explicitly referring to 3% net core level as a ‘trigger’ for normalization. Instead, they concentrate on data-dependency. This tells us that the MNB may have been satisfied with the modest tightening of monetary conditions of recent weeks (primarily through the modest rise in the forint), but try to avoid an unintended overshooting (in the forint exchange rate), and will carry out its policy normalization in a rather gradual manner, indeed.

That said, recent changes in the MNB’s attitude make it likely that the weakening bias in the forint (fed by easy money talk by the MNB) could fade further and the EURHUF could return to the previous range of 308-318.