Hungary central bank appears to hit the brakes but is still flooring the gas pedal

Central bank to hit the brakes, but only apparently

As the first step of phasing out the bond purchase programme, the MNB will not set a total target amount in the future, instead setting weekly goals. Previously, the central bank said it would carry out a technical review of the programme when it hits the HUF 3,000 billion mark, which was to be reached in a few weeks’ time, so

it was to be expected that there would be some kind of decision concerning the QE programme, but the majority anticipated a further increase of its limit.

So far, the MNB bought about HUF 60 bn in bonds at the weekly Tuesday auctions and in the secondary market. This has now been lowered to HUF 50 bn, but the central bank will maintain flexibility, which means it could buy more at any time depending on market conditions, deputy governor Barnabás Virág said on Tuesday after the announcement.

However, if we look at the past few weeks, we see that the weekly totals have been well under HUF 60 bn, which was last reached in mid-June, and the typical amounts since then have been between HUF 52 and 55 bn.

This means that the announcement will not necessarily have an immediate effect and it is more of a symbolic move.

Of course, it cannot be ruled out that the MNB will deviate from the HUF 50 bn amount just as it did with the former HUF 60 bn one, but it will likely be guided by caution until the next decision in September in order to control market effects.

The Monetary Council of the MNB could therefore decide on continuing the programme in a month. This is because in the future, the current HUF 50 bn weekly limit will be reviewed quarterly, at the same time inflation reports are published.

If the MNB sets an even lower target next month, that will represent a palpable tightening, while the current move is more to test the market.

The slowing of the asset purchase programme will not be even across the board as the MNB will first cut back purchases of shorter maturities, so the relative weight of longer bonds could increase. The question is whether there are enough long bonds left in the market, as the MNB already had to include shorter maturities (under 10 years) early this year because the amount of longer bonds on offer dropped significantly.

At the time the programme launched, the MNB set a limit of 33% for each series of bonds, which was later raised to 50% and is now handled flexibly. While there is no explicit threshold, it is likely that the central bank does not want to significantly exceed the 50% mark in any bond series.

This, however, severely limits the MNB’s room to manoeuvre as it already holds either more than 50% or close to half of nearly all series longer than 10 years.

This means that if the central bank is aiming for the longer maturities, it will have to up the limit even further. All the more so because the Government Debt Management Centre (ÁKK) has been holding its bond auctions biweekly instead of each week since April, so the amount on the market is growing much slower than the MNB is buying up the securities. At its most recent auction on 12 August, for example, the ÁKK sold HUF 35 bn of the 2033/A series, while the MNB has bought HUF 22 bn of the same series since the beginning of August. If the central bank intends to reduce the amount of short maturities it holds, the ratio could shift even more towards longer bonds. (In the long term, it is conceivable that the MNB will limit purchases to 50% of new issues, which would mean the ratio it holds in each series would not grow further.)

But why was there a need to buy bonds, and where did it go?

Central banks around the world have been using quantitative easing (QE) for a long time, but it has become a common practice only after the 2008-2009 crisis. The Fed and the Auropean Central Bank (ECB) have been buying securities effectively by the truckload, and not just government bonds but also mortgage bonds and even corporate bonds. The purpose of these moves was to suppress market yields for longer maturities on the one hand, and also to help finance the central budget by stabilising demand for government securities.

The coronavirus pandemic and the resulting crisis change the picture: while QE was formerly primarily a privilege of developed central banks, it has now appeared as a tool for central banks in emerging economies as well. The MNB joined this group last May and

the Hungarian central bank has bought bonds worth more than 5% of the country’s GDP since then.

The primary goal of the MNB was to soften potential fluctuations due to the crisis in the bond market. The QE programme may have been born as a result of market tension in March and April 2020 when investors became uncertain after the pandemic had broken out. The intervention of the central bank was justified under those conditions, and the Polish and Czech central banks also started similar programmes in the CEE region.

While asset purchases continue in most countries,

It has been increasingly hard to justify for the MNB to continue its programme after it began a rate hike cycle in June.

The Monetary Council has so far insisted that it was preparing for a “sustained presence” in the bond market, and there has been no mention of slowing or stopping the programme. However, there has been increasing doubt in the market as

the firming of the forint was hindered by the inconsistent monetary policy of raising the base rate while continuing to keep long yields low.

The MNB is now trying to resolve this contradiction as the stronger forint would also help the central bank meet its inflation target. The question is how fast it will reduce the amounts bought and whether this will be convincing enough for the market. Also, the above contradiction will remain in existence as the central bank also decided to raise the envelope of its Bond Funding for Growth Scheme by HUF 400 bn last Tuesday. This means that while the base rate is rising and bond purchases are being phased out, the MNB will continue its stimulus using this channel.

Overall, the gradual ending of the QE programme is justified as the bond market is doing fine amidst the post-crisis recovery, and not increasing liquidity further could help stem inflation. Also, as mentioned above, the ÁKK is now only holding bond auctions biweekly, so the market supply has also decreased.

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