Sterilisation rate hike as promised, and an unexpected new conflict with the EU

HUNGARY - In Brief 02 Jun 2022 by Istvan Racz

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Today's 30 bps sterilization rate hike, to 6.75%, was announced by the MNB already two days ago, and it was of the same size as the monthly increase following the previous rate-setting meeting one month earlier. So the immediate market impact was understandably small: the forint has strengthened only slightly below the EURHUF 395 line. On the positive side, the amount of HUF liquidity drawn into the 1-week deposit facility for the next seven days was HUF9625bn, significantly down from HUF10070bn at the start of this month. It is not immediately clear how this reduction was achieved, as in this period, no new reverse swaps or discount bonds were launched, and the reflow of liquidity from maturing FX swaps or the redemptions of refinancing loans by banks represent a much smaller amount. But it is generally good news if the stock on which the  MNB is required to pay the sterilisation rate is getting smaller, as it increases the Bank's degree of freedom to do active monetary policy. By the way, the forint may be adversely affected in the forthcoming days by the most recent conflict between Fidesz and the EU. Despite the political accord reached on the oil embargo over the weekend, Hungary again blocked the approval of the EU's 6th anti-Russia sanction package yesterday, demanding the removal of the head of the Russian orthodox church from the list of sanctioned individuals. Diplomats of EU member states have got quite angry about this, and there has been an unfortunate exchange of messages full of nasty terms between the foreign policy speaker of the European People's Party and a founding father of Fidesz (who fortunately does not have any official rank in Hungary). At thi...