End-2016 3-month deposit target achieved, new end-Q1 target does not look very ambitious

HUNGARY - In Brief 21 Dec 2016 by Istvan Racz

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The Monetary Council's rate setting meeting of yesterday did not bring about to any significant surprises, which is a relatively rare occasion in itself. Interest rates were not touched, just as expected. The only interesting decision was the setting of the end-Q1 target for the total accessible stock of the 3-month deposit facility. As announced, the MNB wants to reduce the 3M depo stock to HUF750bn by end-March, from the current HUF900bn, the latter of which is identical with the existing target set for end-2016.At first glance, the new target for Q1 does not seem very aggressive, compared to the fact that the stock of the 3-month deposit was reduced by as much as HUF865bn in Q4 2016 alone, in addition to the halving the bank reserve ratio from December, which represented a HUF171bn reduction of monetary sterilization. Perhaps the MNB might feel that it went a bit too far with monetary loosening (?). Indeed, it could be argued that a 0.06% auction yield for 3M treasuries and a 0.39% 3M BUBOR might be too low for an economy where CPI-inflation was 1.1% yoy most lately, and is moving further up, prospectively to 1.5% yoy this month. By the way, the MNB also said yesterday that its new forecast for average CPI-inflation in 2017 is 2.4%.The foregoing combination of inflation and central bank interest rates does not seem to be very secure in an economy where the government is just planning to loosen up fiscal policy, to the tune of 3-3.5 percentage points of GDP, by which the fiscal deficit is envisaged to deteriorate in 2017, compared to January-November 2016. (On paper at least, as we cannot see the policies for now, which would push the fiscal deficit that far up next ...