Economy
INSTANT VIEW - Hungarian cenbank tightens, yet retains loose stance
New corporate bond programme announced
In terms of rate-setting and liquidity guidance, the central bank’s decision was roughly in line with expectations, with the Monetary Council hiking the O/N deposit facility rate by 10bps to -0.05%, and signalling some tightening of monetary conditions via liquidity management.The target for average “liquidity to be crowded out" was reduced to a minimum of HUF 300-500 bn in Q2 (from HUF 400-600 bn in Q1), as anticipated, something which is likely to be achieved through the reduction of the FX Swap stock (in the press conference Deputy Governor Márton Nagy mentioned that he sees the stock of FX Swaps falling HUF 130 billion).
The bank, however, surprised with the additional announcement of a HUF 300 billion corporate QE programme to be launched in July, and even more so, with an unexpectedly super-dovish guidance.
Morgan Stanley, J.P. Morgan.
Pasquale Diana, Morgan Stanley, London
Bottom line: Today, the NBH announced the much-awaited tightening of its policy stance, raising the deposit rate by 10bp and lowering its liquidity target for 2Q19 by around 100bn HUF. However, the bank also announced the launch of a bond purchase programme (300bn HUF). And during its press conference, the NBH governor stressed that this was not the beginning of a tightening cycle. The market perceived the announcement as dovish (rightly, in our view), but plenty of question marks remain.The first tightening move since 2011. The National Bank of Hungary raised the deposit rate by 10bp and announced that the crowded-out liquidity target for 2Q would be at least 300-500bn HUF, which is 100bn HUF less than in 1Q. This was fairly close to what we had anticipated, and represented the first tightening move since 2011.
However, the decision had clear dovish undertones, on two accounts. First, the bank announced a corporate bond purchase programme, called the Bond Funding for Growth Scheme (BGS). This would be worth 300bn HUF, and will be launched in July. The stated objective of the programme is to improve the functioning of the policy transmission mechanism (see here), and the extra liquidity will be sterilised at the preferential O/N facility. However, a credit easing programme sits at odds with an overall message of tightening, in our view. Second, in the Q+A that followed the decision, NBH representatives stressed that this move would not be the beginning of a cycle, and that policy would remain loose. According to a Bloomberg quote (26 March), the governor even suggested that this move would be a one-off.
The statement leaves the door open to further moves, however. In light of the above, it is perfectly rational for the market to have interpreted the decision as dovish, in our view. We had viewed risks to today’s meeting as tilted in a dovish direction but clearly today’s tone surprised us. Note however that the statement does not really rule out future moves. It simply suggests that the Council will base its decisions mainly on the quarterly projections for GDP and CPI published in the Inflation Report. In other words, the statement indicates that the policy stance will be reassessed every three months. In that sense, the door is open to future moves.
The projection: higher growth and inflation ahead. In a rare exception among central banks, the NBH revised upwards both its growth and its inflation projections. The bank now sees growth at 3.8% in ‘19 and 3.2% in ‘20 (previously: 3.5% and 3.0%). And it sees CPI averaging 3.1% in both ‘19 and ‘20 (previously: 2.9% and 3.0%). Moreover, the bank sees core inflation above target throughout its forecast, although it starts easing in the autumn (see Exhibit 1 and Exhibit 2).
Plenty of question marks remain, but a dovish outcome nonetheless. Admittedly, we don’t know what rates path is assumed in the forecast, but we would find it quite surprising if the forecast were consistent with a single tightening move. We therefore would interpret today’s comments as aimed at discouraging the market from expecting a move at every meeting, as if the bank were on auto-pilot. Instead, the NBH wants to reassess the situation quarterly, and act accordingly if it needs to, in our view.
That said, the key takeaway today isn’t so much that the NBH finally tightened policy for the first time since 2011. Rather, it is that it did so in a way that suggests downside risks to the normalisation path we had envisaged in recent research. We believe that future comments, as well as the minutes from today’s meeting (out on April 10), may shed more light on the NBH’s decision.
José Cerveira, J.P. Morgan, London
- Market rates may rise somewhat after today’s hike, but overall monetary conditions are probably as easy as they were in the beginning of the year;
- Backtracking of recent guidance and lack of a firmer commitment to containing inflationary pressures suggest the NBH will only tighten as much as it is forced to;
- We continue to see market rates trending higher towards base rate level (0.90%) around 1Q20;
- Core inflation likely will continue on an upward trend, to peak and plateau at 3.6%oya around the turn of the year, which in our view will put the Forint under pressure, forcing the NBH’s hand.
Today the NBH delivered an ambiguous mix of policy and guidance, with small tightening policy tweaks diluted by the launch of a corporate QE program and an extremely dovish message of “one and done".
In isolation, these measures would probably be received by the market as roughly neutral: a small but symbolic turning point in policy direction to address the rise in core inflation. Yet, the NBH surprised with the additional announcement of a HUF 300 billion corporate QE program to be launched in July, and even more so, with an unexpectedly super-dovish guidance.
In the press conference, Governor Matolcsy argued that today’s decisions are a necessary and sufficient step to achieve the inflation target, that the hike is just a one-off and that it is not starting a tightening cycle, which effectively signals that this was it, a “one and done". The statement does not go that far, but there is also a clear shift in focus away from inflationary risks.
Bond purchasing program to ease monetary conditions via the risk premium channel mainly. The new QE-type program will start in July 2019, with the NBH purchasing up to HUF300 billion in HUF-denominated bonds, issued by non-financial corporates. At this stage, these purchases have limited easing scope, given that the pool of assets available to purchase is below 1bn Euro, so easing will be transmitted (for now at least) almost exclusively through the risk premium channel.
Over time, it adds an incentive for firms to borrow through the bond market, and we do not rule out that the NBH increases the scope of the program in the future. On the market rates side, the program is perhaps neutral, as the newly-created liquidity will be sterilized at the preferential facility rate (90bps), not at the overnight (-0.05%).
None and done: monetary policy probably is now as easy as it was in the beginning of the year. Admittedly, it’s not straightforward to quantify the easing effect of the new corporate bond buying program; it likely is a small effect. But, if we consider it in aggregate with the FGS-fix lending scheme that started in January and with the post-February fall in market rates (the old preferential deposit facility’s expiry at end-February pushed some HUF400 billion of excess liquidity to the negative-yielding o/n deposit facility), it probably is not much smaller than the 10bps of tightening delivered today. Effectively then, Bubor rates may be moving somewhat higher in the next months, but overall monetary conditions probably remain unchanged since the beginning of the year.
Backtracking of inflation-targeting guidance risks hindering the effectiveness of communication going forward, possibly impelling steeper adjustments down the line. Today’s delivery backtracks on the guidance built over the past 6-9 months and fails to present a clear commitment to containing inflationary pressures. Certainly this stance is facilitated by the soft European data and dovish twists in the ECB/Fed guidance, but in our view, such a U-turn is hard to justify on that basis alone, particularly as core inflation accelerated faster than expected by the NBH, GDP growth is clearly above potential, and the labor market is exhausted and generating strong wage growth.
Signaling a one-off hike at this stage sends, in our view, a message that the MC will to a large degree tolerate inflation overshoots, and is not inclined to tighten any more than what it is forced to by the market (i.e. by Forint weakness).
Guidance suggests that the NBH will try to deliver as little as it can get away with, but with inflation expected to rise further, we continue to see market rates at base rate level around 1Q20. We see core inflation continuing to grind higher, peaking and plateauing at 3.6%oya around the turn of the year, with upside risks resulting from overheating dynamics but tempered by a weaker and low inflation external environment. This is similar to the NBH’s projection for 2019, but probably stronger for 2020 (“Core inflation excluding indirect tax effects is expected to continue to rise until the autumn months and then to decline from the end of 2019"). As inflation picks up, we expect that the central bank’s stance will change. In particular, further rises in CPI likely will be matched by currency weakness and force the NBH’s hand, with market rates rising towards the base rate level (0.90%) around 1Q20.
