Economy
ANALYST VIEW - Hungary central bank has “a million ways" to ease
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The upcoming policy meeting (21 Nov) of the Hungarian central bank (NBH) will be the clear highlight of the coming two weeks in Hungary. In view of the bank’s rhetoric, its recently published minutes and comments by central bankers, Morgan Stanley expects the Monetary Council will announce some of its new easing tools.
Even if you had any doubt about the central bank’s intentions - which would be odd given its recetn rhetoric - the minutes of the October policy meeting make it clear that the discussion has moved to the shape of the yield curve.Council members agreed that driving down long-term yields was the new focus of the MPC, and would also promote financial stability because it would lower interest rate risk for households.
Members discussed the instruments that could be used to ease monetary conditions further, and concluded that there is a "wide range of tools" available. Pasquale Diana, analyst at Morgan Stanley in London, thinks think that already on 21 November (or on 19 December at the latest) the NBH will announce some of these tools.
Monetary Council member Gyula Pleschinger has said in recent interview that the NBH has not run out of tools and can be "creative and innovative". Its new tools can range from QE to various swap constructions (we assume IRS or FX swaps). In short, there are "a million ways" to ease and the bank is working on the optimal tool or mix of tools, Diana said.
Pleschinger added that he thinks the NBH will deliver this already this year.
The analyst also highlighted that reflation is real. Morgan Stanley is marginally higher than the Street on CPI next year.
“Our work suggests that underlying inflation is likely to pick up, on the back of tight labour markets and supportive policy. Diana reminded that wage growth already reached double-digit levels in early 2017, on the back of a minimum wage hike.
In his view, the central bank is happy to be behind the curve, and there are no triggers to change for now.
Even if you had any doubt about the central bank’s intentions - which would be odd given its recetn rhetoric - the minutes of the October policy meeting make it clear that the discussion has moved to the shape of the yield curve.Council members agreed that driving down long-term yields was the new focus of the MPC, and would also promote financial stability because it would lower interest rate risk for households.
Members discussed the instruments that could be used to ease monetary conditions further, and concluded that there is a "wide range of tools" available. Pasquale Diana, analyst at Morgan Stanley in London, thinks think that already on 21 November (or on 19 December at the latest) the NBH will announce some of these tools.
Monetary Council member Gyula Pleschinger has said in recent interview that the NBH has not run out of tools and can be "creative and innovative". Its new tools can range from QE to various swap constructions (we assume IRS or FX swaps). In short, there are "a million ways" to ease and the bank is working on the optimal tool or mix of tools, Diana said.
Pleschinger added that he thinks the NBH will deliver this already this year.
Given the dovish minutes and these comments, we would be very surprised if the NBH did not announce new tools on November 21
, Diana added.What could these tools be?
Diana thinks QE would be straightforward but is unlikely, as “it is hard to justify at this point in the cycle and it would swell the NBH balance sheet."“To drive down long-term yields, a resumption of the IRS programme would seem more likely, for instance."
In his view, it is less obvious what the NBH can do to incentivise banks to offer more competitive long-term fixed loans, and we may or may not get news on this at the November 21 meeting. However, the point is that “simply flattening the curve is only an intermediate goal for the NBH. The end goal is to get as many households as possible onto fixed interest rates."Morgan Stanley vs. the market
There is a perception in the market that the authorities would like HUF to weaken. While this may be true, the BoP still looks supportive for the long-term HUF outlook and therefore Diana doubts that the NBH will be able to engineer long-lasting depreciation in any case.The analyst also highlighted that reflation is real. Morgan Stanley is marginally higher than the Street on CPI next year.
“Our work suggests that underlying inflation is likely to pick up, on the back of tight labour markets and supportive policy. Diana reminded that wage growth already reached double-digit levels in early 2017, on the back of a minimum wage hike.
In his view, the central bank is happy to be behind the curve, and there are no triggers to change for now.
We believe that the NBH will likely remain well 'behind the curve' in normalising interest rates, and if anything looks set to ease more in the near term. While monetary policy looks excessively loose, a large external buffer which supports HUF, a desire to keep rates low for as long as possible and CPI likely to stay sub-4%Y mean that the NBH is in no hurry to sound less dovish. Bubor may well rise as a result of tighter policy eventually, but this is likely to happen well into 2018, if not even beyond 2018.
