Hungary central bank raises interest rate on the low-low
The bank is set to release the results of its one-week deposit tender at 3 P.M. today but it has already announced the tender, showing that bids will be accepted at an interest rate of 0.75% instead of 0.6% (the base rate) previously.
This is practically a rate hike.
This move is considered monetary tightening because in the last few months the one-week deposit instrument was an effective benchmark for months, i.e. its rate is also a benchmark. Until now, the fixed interest rate matched the base rate, and this is the first time we see a difference. The amount of accepted bids will be revealed later but the NB had promised earlier that it would accept all of them.
The Monetary Council of the MNB decided on Tuesday to keep the base rate on hold at 0.6%, and the interest rate corridor was also left unchanged, while emphasising that decisions regarding the one-week deposit could still be expected on a weekly basis.
The introduction of the 1w depo tenders on 1 April was already a massive rate hike, given that the base rate was then 0.9%, while the O/N deposit rate was (and still is) -0.05% and extremely short-term rates on the interbank market were under 0.5%.
The base rate has not been the MNB's key tool to affect market rates for a long time now. It has been influencing interbank rates bz active liquidity management tools. The 1w deposit instrument was introduced during the capital market turbulence of the first coronavirus outbreak.
Although the MNB never promised to keep this tool alive for good, it has been at the market's disposal without limitations and it absorbed all excess liquidity from the banking system. This tool which was launched in an emergency situation has become the key instrument of monetary policy to affect interest rates. The interest rate on the 1w deposit facility is set by the Board of Directors on the day of the tender and not by the Monetary Council.
This is the first time the interest is different from the base rate. It is not only unprecedented but most peculiar as well, given that only two days ago the MPC left monetary conditions unchanged. It is not so shocking, however, given that the constant easing of the forint, the closure of long HUF positions and the expansion of the short HUF portfolio, as well as interest rate hike expectations reflected by FRAs (forward rate agreements) have been placing the central bank under ever greater pressure. We should note that today's rate hike de facto cancels out half of the two rate cuts the MNB carried out in the summer.
The MNB is thought to have responded with today's move to the HUF depreciation of the last few days, as the forint eased close to its all-time low against the euro.
EUR/HUF
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