EURHUF at 415-417 today: the MNB will have take a much tougher approach to monetary tightening

HUNGARY - In Brief 06 Jul 2022 by Istvan Racz

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Tomorrow will be the day for this week's 1W deposit tender. With a seemingly uncontrolled slide of the forint for whatever reason (there are some around indeed), the MNB will have little else to do than markedly scaling up its tightening efforts. Please, notice that the MNB has just raised its average CPI-inflation forecast for this year to 11.8% (the midpoint of its new 11-12.6% forecast range), from the previous 8.9%, which had been held by them for a two-month period before the latest revision. This represents a 290bps increase in less than one quarter. Against that change of view, the Bank raised its sterilisation rate by a total 160bps in Q2, which is hardly proportional to the speed of deterioration in terms of short-term inflation prospects. In addition, the exchange rate is essentially the only channel through which monetary tightening can have a really serious impact. Bank deposits are simply not reacting to sterilisation rate hikes, as banks appear to be smarter than competing for deposits at a time when they have HUF10000-11000bn of free HUF liquidity at the MNB, richly paid by the latter through the deposit rate. Recently, the government has decided to impose a hefty tax on banks because of the gain they are making this way, dampening further the prospects for an effective conduct of monetary policy. The credit channel is compromised as well, because of the continued existence of interest-rate subsidies to SMEs, low-cost baby-expecting loans and low-cost green credits. No accident year-on-year credit growth is still firmly in the double-digit range. We have said recently that the government needs SOME forint deterioration and inflation to help its fiscal ad...