A somewhat bigger step to support the forint today

HUNGARY - In Brief 03 Feb 2020 by Istvan Racz

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Today's weekly FX swap tender was the third in a row at which the MNB gave a clear signal that the forint's recent weakness had reached largely the limits of its tolerance. The Bank rejected all bids today, cutting the stock of FX swaps by HUF 130bn, to HUF 2055bn, effective Wednesday. This came after a HUF 50bn reduction at last week's tender and a HUF 38bn net withdrawal two weeks ago.Adding to the significance of today's step was a brief paper published by the MNB staff on January 30, which said that banking sector liquidity was expected to fall autonomously through end-February because of the maturity and early repurchase of some HUF 850bn of FX-denominated government bonds until that time. Here the impact indirectly stems from the fact that the government is using it HUF deposits to buy the FX from the central bank, and those deposits are to be replenished by the net issuance of HUF-denominated government debt. So any cuts in banks' liquidity through reducing the FX swap stock should come on top of that autonomously developing liquidity squeeze.And yes, total HUF liquidity on February 2 was HUF 955bn according to MNB data, down from HUF 1057bn a week earlier, so there was no increase whatsoever in recent days that the MNB would have had to compensate for. And this time around, even BUBOR moved up a bit: today, the O/N rate was 0.09%, up from 0.05% at end-December, whereas the long end (1-year) went to 0.38% from end-december's 0.27%.The latter is no great tightening, of course, but it is good to remember that the primary sources of domestic inflation always include the EURHUF exchange rate, and the FX swap instrument is an effective tool to influence it.