Another tiny MNB step in the tightening direction

HUNGARY - In Brief 02 Apr 2019 by Istvan Racz
Following a 10 bps increase in the O/N deposit rate from March 27, the MNB carried out its second small step on its road towards monetary tightening yesterday. This was a HUF10bn reduction of the outstanding stock of FX swaps, to HUF1979bn, from April 3 as the value date.As well known to the reader, the MNB reduced its target for the quarterly average stock of non-sterilised excess liquidity by HUF100bn, to HUF300-500bn, for Q2 at the Monetary Council's March 26 meeting. Given that the Bank sells FX swaps on a weekly basis, reducing the stock by HUF10bn would add up to a total reduction of HUF130bn in Q2, which was a number specifically mentioned by vice governor Nagy at the press conference held immediately after the MC meeting.As a technical footnote, the MNB normally speaks of non-sterilised excess liquidity as 'liquidity to be squeezed out' in its documents, but the two categories appear to be identical. A possible reason why they do not use the term 'excess liquidity' is that in addition to mandatory reserves, the MNB also sterilises liquidity through what they call preferential deposits, which represent non-mandatory deposits on which the Bank pays the sterilisation rate (= the base rate).This latest development, i.e. that the Bank indeed started to implement its announced plan to reduce excess liquidity, moderately and by small amounts at each time, should not have any significant immediate impact on the money market, yet it may help eliminate uncertainty regarding their true intentions. As the reader will recall, the initial impact of the deposit rate hike was more than offset by the Governor's verbal intervention after the meeting, which has driven the forint ...

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