Economy
Tightening in March long gone - Will MNB be psyched up amidst storm?
Interest rate cemented
As we got used to it, the Monetary Council is unlikely to alter rates, at least none of the analysts polled by Portfolio expect it to do so tomorrow. This way, the base rate is to remain unchanged at 0.9% and the overnight deposit interest rate is to remain -0.05%. If any of these were changed, it would be a huge surprise.
The Monetary Council is expected to reiterated the key messages of the last two months, remarked Orsolya Nyeste, analyst at Erste Bank in Budapest. The extermal interes rate and yield environment has changed drastically over the last month. The continuation of normalisation and monetary tightening is not on the agenda anywhere. Instead, the story is about the potential ways of easing and its degree, she added.
The MNB still has a rather wide manoeuvring room therefore it is unlikely to find any rason why it should modify its loose monetary policy stance
, said Nyeste. She believes the central bank will first hike rates at the end of 2021, but the base rate could remain on hold even until the end of 2022, in her view.Gergely Suppan, analyst at Takarékbank, also highlighted how much the pressure on the MNB has decreased, as a result of decelerating inflation and heightened rate cut expectations globally. He thinks that the first tightening measure by the MPC could arrive “sometime in the medium term".
Ákos Kuti, analyst at MKB Bank, underlined that inflationary processes and international developments will likely convince the MNB that it’s worth to take up a wait-and-see stance. The next Report on Inflation is to be released at the end of September, so at the 24 September rate-setting meeting the MPC will already have the latest estimates therefore
at the September policy meeting, the MPC might raise the subject of fine-tuning monetary conditions again
, he added.Overall, the MNB should be cool like Fonzie; it does not really have to make any particular remark unless it is concerned about the EUR/HUF exchange rate being around 330. Investors are primarily focusing on the Fed and the ECB, both of which will have policy meetings in mid-September. This means that the MPC will be able to set the direction for the following quarter in light of those decisions. If the ECB meets expectations and starts easing again, the MNB could be encouraged, and it might cautiously ease monetary conditions, via liquidity-related measures.
We need to stress that the forint remains week and inflation is over the central bank’s target, albeit only slightly, so the necessity to tighten has not vanished entirely
, commented slightly more cautiously Gábor Regős, analyst at Századvég.It is as if the MNB has already become bolder
We should expect an eventless, quiet meeting on Tuesday, but there is one factor that may be signalling a turnaround. At the end of March, the MPC decided to raise the O/N deposit rate by 10 basis points and also to reduce the stock of outstanding FX swaps, which was around HUF 2,000 bn at that time, thus lowering the volume of liquidity that needed to be crowded out from the interbank market. This move can help keep interbank rates and the yields on short-maturity government securities persistently low, as in tenders the MNB sells banks forint at different maturities in exchange for foreign currency. If in the meantime it manages to boost interbank liquidity, it is practically monetary easing.Since the spring, the MNB has been communicating that the change in the stock of outstanding FX swaps is not a one-way street, and if the liquidity position demands it, the stock could be boosted. It stressed, however, that this will not mean easing, and that the bank will only maintain liquidity in the banking system, and any decision regarding the stock of outstanding FX swaps will be made in line with the natural liquidity processes. Simply put, if the liquidity in the banking system was to decline, the MNB stands ready to inject more funds in it to maintain but not to increase the excess liquidity.
Over the last few weeks, though, the stock of FX swaps showed a spectacular rise, and by now it is higher than before the cautious tightening in March. We cannot tell for now whether this also brought about a change in the liquidity of the banking system, or the central bank is injecting money into the system because liquidity has been drying up. The odds are higher that it is the latter scenario, as the amazing success of the ‘superbond’ has the capacity to tighten liquidity of the banking system, and it is possible that this is why the stock of outstanding FX swaps need to be increased.
the National Bank of Hungary is ready to change the stock of the FX swap instrument in a flexible manner to ensure that the interest rate transmission changes in line with the decisions by the Monetary Council.
Analysts agree that if it should come to monetary easing, it will be done via liquidity. The market is split, however, as to how a potential raise to the stock of the FX swap instrument can be regarded as easing. The ‘dispute’ is likely to be settled by the impact of the measure, i.e. whether it will boost the liquidity in the banking system or not.In respect of the liquidity estimates, the biggest surprise could be delivered by the MNB tomorrow if it hints, for instance, at its readiness to boost liquidity via swaps. That could indeed be interpreted as an easing measure. The bank, however, could easily wait until September with such a remark, and if the ECB lowered rates, such a cautious easing in Hungary would even be a logical step.
