No change at today's rate-setting meeting, soft policy stance maintained

HUNGARY - In Brief 24 Jan 2017 by Istvan Racz
No one on the market expected the MNB to announce any policy change today, and the Monetary Council met that strong consensus expectation. The base rate remains at 0.9% and the O/N interest-rate corridor at -0.05-0.9%. Previously, the MNB said that it is going to offer HUF125bn at tomorrow's 3-month deposit tender, which is more than the maturing HUF100bn. But the reason is purely technical, rather than policy-driven, and the end-Q1 target for the stock of 3M deposits is still HUF750bn, i.e. HUF150bn down from end-2016. In its communiqué today, the MNB said again: 'in case it is required in order to reach the inflation target, the Monetary Council is ready to loosen monetary conditions further, by non-conventional, targeted methods'. Translating this into common English from the somewhat unnatural language of inflation targeting, the MNB is prepared to fight against the strong forint if the latter threatens real economy growth, to the extent allowed by the inflation target, without (or by) not touching interest rates.There are currently views on the market, according to which HUF longs are a good buy for 2017, as the forint may strengthen to EURHUF 300 by December, or at least to close to that level. We do not agree, even though it is true that the de-sterilization program has not been very efficient in fighting against the strong HUF: the external income surplus remains big and de-sterilization has not been able to generate the sufficient amount of capital outflows. But the other side is that the MNB most probably will do everything in their capacity to avert a forint appreciation against the euro, as that could ruin GDP growth plans completely. One way for them to do...

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