MNB decided to loosen monetary conditions further on September 22-23

HUNGARY - In Brief 23 Sep 2015 by Istvan Racz

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The MNB decided to keep its base rate at 1.35% yesterday, but the bank changed the main sterilization instrument on which the base rate is paid, from 2-week deposits to a new 3-month deposit facility, with unlimited access. This morning, the Bank held an auction for 2-week deposits, at which it limited the acceptance of offers to HUF1500bn, sharply down from the HUF2273bn amount of new deposits accepted last week. In fact banks offered only HUF1473bn of funds at the auction, slightly below the pre-set acceptance ceiling, and the average interest payable on the new deposits came out at 1.2%. The outstanding stock of 2-week deposits at the MNB thus fell to HUF3746bn from HUF4513bn. All this is pretty much in line with previous announcements by the MNB and with market expectation, with one important exception. The MNB's action looks like the implementation of the Bank's long-announced 'self-financing' plan, the aim of which is to force banks to withdraw funds from MNB sterilization instruments, with a view to buying HUF-denominated government debt or repay loans drawn from abroad. Previously, the MNB said that it wanted to reduce the outstanding stock of 2-week deposits to HUF1000bn in a straight line by end-2015, but today's cut in the accepted amount of new deposits seems to be much more aggressive than required for the achievement of that goal. Given that 3-month treasury bills currently pay around 0.4%, banks are likely to turn to the much more rewarding 3-month deposit facility. In doing this, they will be limited though by the MNB's liquidity coverage ratio requirement, which is to be set at a minimum 60% from October 1, 2015, on the basis of EU law, and will be set...