Hungary’s central bank (NBH) has allotted 200 billion forints worth of 1-month FX swaps providing HUF on its tender on Monday, replacing HUF 150 bn maturing in the same tenor. Citigroup analyst Eszter Gárgyán said the bank is unlikely to be under pressure to tighten liquidity conditions, and likely to aim to keep rates via liquidity management until at least late 2018.
Liquidity injections have increased by HUF 50 bn as a result of Monday’s swap tender, reaching altogether HUF 650 bn in 1M, 3M and 6M FX swaps.
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The NBH has communicated that it will continue to rely on FX swaps to anchor the front end of the yield curve, which provides a flexible tool to manage liquidity conditions. The MPC already decided in March about the extension of FX swap tenors to 12 months, Gárgyán said in a research note on Tuesday.
She noted that this tenor has not been auctioned yet but "is an indication of the NBH’s effort to anchor forward BUBOR expectations and we believe there may be even longer tenors added, if needed."
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The recent drop in oil prices, soft CPI surprises and potential regulative price cuts (VAT and/or utility prices) may create room for the NBH to maintain its current dovish stance in the next 6-8 quarters.
Recently, monetary policy communication has increasingly put emphasis on not just keeping the policy rate unchanged (at 0.90%) but also maintaining the current loose stance of monetary conditions, Gárgyán added.
"Given the low FX pass through to CPI, the NBH’s tolerance towards weaker FX and Hungary’s large structural trade surplus, the NBH is unlikely to be under pressure to tighten liquidity conditions and will likely target to keep interbank rates at current compressed levels via liquidity management until at least late 2018."