MNB's rate decision followed analysts' expectation, kind of

HUNGARY - In Brief 24 Jan 2023 by Istvan Racz

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The Monetary Council left all of its interest rates unchanged today, just as analysts expected. But this does not mean there were no policy changes at all. Most importantly, the mandatory reserve ratio for banks will be raised further, from 5% to 10% from April. As a reminder, the Bank raised the ratio from 1% to the current 5% last October. The explanation is that tying down an increasing amount of banking sector liquidity should help the efficiency of monetary policy. But what this measure will actually do is transferring about HUF1800bn of forint liquidity from O/N deposits to mandatory reserves. As the MNB pays 18% on O/N deposits but only 13% (the base rate) on required reserves, this step should save HUF90bn for the MNB is annual sterilisation costs. So, while the MNB will continue to pay the same 18% interest on marginal forint liquidity, it will reduce the average interest on sterilised assets from 16.5% to 15.6% as a result. By the way, they paid this exact same average sterilisation cost back in last October, before the average rate rose further after they auctioned 2-month deposits at 17.95% in late November. Another measure announced today is that the Bank will start auctioning 1-week discount bonds with a weekly frequency from February 1. The reader is kindly reminded that whenever short-term discount bond are mentioned, the MNB's likely intention is to sell these to nonresidents (directly or indirectly, through domestic banks) in large quantities. For example, some HUF1373bn of discount bonds were held by nonresidents at end-December, while at the same time domestic investors held no more than HUF3bn of the same asset. A third, perhaps less important chan...