MNB decision went in the expected direction, but it seems bigger than expectation

HUNGARY - In Brief 21 Nov 2017 by Istvan Racz
The Monetary Council today made decisions which go in the direction of preliminary signals and market expectation, in so far as:- they left all interest rates unchanged; and- they introduced new non-conventional policies, just as they more or less had promised, and so the market had expected.However, the new facilities just introduced are surprisingly big in terms of their likely monetary impact. They are certainly bigger than what we (and a number of others on the market) would have assessed prudent, from the point of view of the feasibility of the Bank's inflation target. And they did it just at the wrong time internationally, when the Romanian leu and the Turkish lira are suffering, posing significant regional risk for the forint. As a result, the forint fell in late trade today, breaking through EURHUF 313 by the end of the day.As known already from the screens, the two new programs, both to be launched from the start of January 2018, are:- a scheme for the MNB to sell banks 5 and 10-year IRS contracts for unconditional use, starting with a maximum HUF300bn to be sold in Q1; and- a program for the MNB to buy over 3-year maturity mortgage bonds, up to about 50% of the currently existing stock of such instruments of HUF900bn over an unspecified period.Somewhat curiously, Vice Governor Nagy stressed that these programs were primarily prudential, rather than monetary measures, with the aim of increasing the share of fix-interest-rate mortgage loans, against the current majority of variable rate loans, which are naturally cheaper upfront but carry a marked amount of interest rate risk. Of course, we do not have any problem with the prudential objective, but we believe t...

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