The MNB announced two additional steps to loosen monetary conditions today

HUNGARY - In Brief 25 Oct 2016 by Istvan Racz

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Apparently, the MNB is not satisfied with its previously announced policy of reducing the stock of bank placements into its 3-month deposit facility to HUF900bn by year end, marking a HUF1076bn decrease from the level recorded on September 21, the day immediately before that announcement. Today, the Monetary Council used its monthly rate-setting meeting to decide on a cut of the mandatory reserve ratio from 2% to 1%, effective December 1, and to reduce the O/N credit rate by 10bps, to 1.05%, effective tomorrow. As the 0.9% base rate and the -0.05% O/N deposit rate remain unchanged, the latter measure increased the asymmetry of the MNB's interest rate corridor.In its communiqué, the MNB said that halving the reserve ratio will add HUF170bn to bank liquidity. This is true, although we would put it in a slightly different way, saying that the measure will squeeze this amount out of monetary sterilization. As the latter is currently HUF1723bn - already down by 60% ytd - the additional reduction implies a 10% cut of the total amount of sterilized bank liquidity. Overall, total sterilization is now expected to fall to HUF1150bn by year end, i.e. by HUF573bn down from its current level and HUF3150bn down over the whole year. This looks quite a lot, but please note that Hungary is currently running an average HUF190bn external income surplus per month, which would put heavy upward pressure on the forint, should it not be compensated by capital outflows. In fact, the MNB's aggressiveness in its de-sterilization can be very well explained by the forint's excessive strength against the euro, which is a key threat to GDP growth (for details, please see our latest Quarterly Report)...