MNB credit rates cut by 10-15bps this time

HUNGARY - In Brief 22 Nov 2016 by Istvan Racz

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Today's was just another monthly Monetary Council rate-setting meeting which resulted in some sort of a loosening step. This time around, the Council cut the O/N credit rate by 15 bps and the 1-week credit rate by 10 bps, both to 0.9%. By this step, the upper part of the already heavily asymmetric interest rate corridor has been wiped out completely. This is because the 2-week deposit rate, or the base rate of the Bank, also at 0.9%, has been left unchanged.In principle, a rate cut like this could be a relatively big issue, of course, but practically it is no big deal. The MNB is still regulating through its sterilization policy, i.e. through receiving rather than lending funds. For this reason, today's rate cuts can affect only very small credit stocks. At present, the stock of outstanding 1-week MNB credit is only HUF120bn, and over the past one-month period, the average daily stock of O/N credit was just HUF24bn. For credit rates to really matter, the MNB must first squeeze all remaining sterilized liquidity out of its balance sheet and switch to regulation through lending. But that is unlikely to be achieved before cca. mid-2017. Until then, cuts in credit rates represent little more than a kind of demonstration of the MNB's continued loosening bias.Of course, the MNB could always cut its sterilization rate and that would matter more. But it was only two weeks ago that Governor Matolcsy sent out a very strong message that they would not do so, and so a base rate cut in the near future is just unlikely. What remains for the MNB to do is essentially to continue sumo wrestling with the bank funds still in sterilization.