Did the MNB get what it wanted this week?

HUNGARY - In Brief 23 Sep 2017 by Istvan Racz

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Well, no one can ever be sure, but we think it largely did. But what was it actually they wanted?What they did is well-known, yet a short summary might be useful:1. They cut their inflation forecast quite sharply. Even though they still expect headline CPI-inflation to reach the 3% target in Q2 2019, so they only put back the date by one quarter compared to the June inflation report, the key detail is that for Q4 2017 and Q1 2018, they expect now 2.4% yoy and 2.2% yoy, respectively, as opposed to the June forecast of 2.3% and 2.6%. Yes, they expect falling inflation in early 2018, the period immediately before the election.2. They reduced the end-September stock of the 3-month deposit to HUF300bn from HUF500bn in June, just as promised three month ago.3. They promised to reduce the 3-month deposit stock further to just HUF75bn by end-December, and announced they would stop there, meaning that they do not want to switch to the regulation of liquidity primarily through credit for the time being.4. Instead, as they also announced, they would make steps to increase the role of currency swaps, not least by developing the existing swap facilities further, e.g. with a view to increase the MNB's regulatory role further out on the yield curve. And finally,5. They reduced the 1-day deposit rate to -0.15% from -0.05%.What they got immediately was the following:1. Against widespread expectation, the forint did not weaken further. Initially it even strengthened against the euro, as investors appeared somewhat disappointed; they expected more of loosening:Source: Portfolio.huBut later on, the forint corrected downwards, and by end-week, it returned to almost exactly where it stood i...