In accordance with its meeting schedule, the Monetary Council of Hungary’s central bank (NBH) has on Tuesday reviewed the latest economic and financial developments. But instead of its usual one liner, the MPC released an unusually long statement, emphasising that the capital and liquidity position of local banks are “adequately stable" and that the worsening economic outlook may cause disruptions to financial markets and the banking system.
The MPC released the following statement:
"Sentiment towards Hungarian financial assets has declined significantly in recent weeks, as reflected in an increase in risk premia and the rapid depreciation of the forint exchange rate.
"These were driven mainly by uncertainty surrounding developments in Hungarian economic policy and the outcome of Hungary’s negotiations with the International Monetary Fund and the European Union.
"The Monetary Council welcomes the Government’s strong commitment to reach an agreement quickly with the IMF and EU, which has had a positive market reaction. The Council points out that the capital and liquidity position of the domestic banking sector is adequately stable.
"The persistent weakness of the exchange rate increases the pressure on economic agents to adjust their balance sheets, leads to a deterioration in the outlook for the economy and inflation and may cause disruptions to financial markets and the banking system.
"Monetary policy can best support the recovery by maintaining a predictable economic environment, ensuring price stability and preserving the stability of the financial system.
"If necessary, the Monetary Council stands ready to meet these objectives using the instruments at its disposal."
The forint has been appreciating throughout the day and it gained further momentum after the release of the MPC statement. It is getting closer to 312 versus the euro.
The last sentence may be regarded as a kind of verbal intervention in defense of the financial system and the forint. As a consequence the forint has firmed after the release of the statement. The average yield at today’s 3-month discount T-bill auction (7.98%) and forward rate agreements also reflect that the market continues to expect further rate hikes (some 150-175 bps in 3 months) from the current 7.00% base rate.
The next rate-setting meeting is scheduled for 24 January, i.e. two weeks from today. By then we’ll probably get out of the mire that surrounds the pending IMF/EU aid talks. Should it be so, the central bank may not be forced to hike more than the “usual" 50 bps it has raised rates by at the past two policy meetings.
Interestingly enough, the MPC also issued a longer-than-usual statement a month ago, during days of elevated market pressure. That time, however, we were by far not this content with what the MPC had to say, deeming it ineffective.
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