Hungary’s Monetary Council has lowered its benchmark policy rate by 50 basis points to 6.50% on Monday. The move is in line with the market’s expectations. The central bank (NBH) has lowered its base rate by a cumulative 300 bps since July. At its last three decisions in a row the MPC reduced its key policy rate by 50 bps each.
Although the rate cut may seem as an in-line decision, the MPC delivered a major surprise by increasing the width of the interest rate corridor determined by the overnight credit and deposit facilities to +/- 100 basis points, and also raised the interest rate of the two week fixed-rate credit tenders to 50 basis above the base rate. Subsequently, the interest rate on the overnight MNB bill is 6.50%, 5.50% on the overnight central bank deposit (the interest rate on the two-week MNB bill minus one percentage point) and the interest rate on the overnight collaterised loan (the interest rate on the two-week MNB bill plus one percentage point) is 7.50%.
The NBH increased the width of the interest rate corridor determined by the O/N credit and deposit facilities to +/- 100 bps from 50 bps previously. There have been discussions about such a move on the market for some time now. By the widening of the interest rate corridor the "costs" of preferring O/N deposit facilities to longer facilities have grown. This way the 50-bp rate cut parallel with the corridor widening is even more "dovish".
Hungary’s commercial banks have been leaning to an ever greater extent on central bank assets in their liquidity management since last autumn. The amount of O/N deposits still exceeds HUF 170 bn. The redistribution of less active interbank funds may also have to do with the fact that the interest rate on O/N deposits have been 50-bp lower than the base rate for some time now. Before the widening of the interest rate corridor, commercial banks "lost" 100 bps if they have not put their money in two-week NBH bills.
Oddly enough, the last time the NBH had widened the interest rate corridor was in January 2003, when there hds been an attack "in favour" of the HUF. Although the two stories are very different there are some similarities. Six years ago foreign hot money waiting for the widening of the interest rate corridor flooded the banking system, and the NBH resorted to this tool to squeeze out this huge amount. This time it was not non-resident speculators but the IMF that "bet" on the forint in an environment where players on the interbank market continue to fear transactions of longer maturities. The real goal now would be to push interbank sources towards even longer (3-6-month) instruments and we may just see further measures that shepherd punters that way.
Previously, analysts have said that a widening of the corridor would send a message to market players that the NBH has ceased to be concerned about a new wave of speculation against the HUF that a cheaper interest rate environment on the forint market would trigger.
2009.11.23 14:22
INSTANT VIEW - Hungary c.bank cuts base rate 50 bps, widens corridor About the "official" rate decision The unchanged pace in monetary easing - according to the MPC’s previous minutes - is that the rate setters continue to aim at maintaining a transparent and calculable rate cut cycle. Today’s rate call was likely based on the same arguments that have determined monetary policy since the onset of the world economic crisis.
1. The outlook on inflation has improved so dramatically, especially in H2, that even the VAT hike (on 1 July) could not fully pass through to prices. The CPI data has surprised on the downside repeatedly over the past few months.
2. The deep recession in the economy would also justify much lower interest rates (GDP is seen contracting by cc. 7.0% in 2009, i.e. the country steps back a few years in terms of growth.)
3. What is working against the aforementioned two factors is global risk aversion and rapidly changing sentiment, as well as uncertainties about the Hungarian economy. The importance of this factor is clearly reflected by the fact that the rate cut cycle commenced when sentiment turned palpably milder on global markets - and rate cuts will probably continue until this situation does not change.
The MPC’s arguments in its official statement due to be published at 15:00 CET are likely to be similar to the aforementioned. The focus is most likely be on inflation , not only because in its communication the NBH has been trying to return to the logic of inflation targeting, but also because the MPC had fresh CPI data to work with.
The NBH staff is set to publish its quarterly Report on Inflation on Wednesday. Today we will be let in only on the key figures.
NBH Governor András Simor is to hold a press conference at 15:00 CET on the background of the rate decision. We are keen to hear what he will say about the widening of the interest rate corridor.
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