The MNB base rate ceased to be the main sterilisation rate today

HUNGARY - In Brief 20 Oct 2022 by Istvan Racz

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It has been an open question since the announcement of the current 18% O/N deposit rate on October 14, how exactly the MNB would sort out the the conflict between this new instrument and the 1-week deposit facility, so far the main sterilisation instrument used by the Bank, on which the 13% base rate is paid. Well, the solution, at least for the time being, appears to be that the MNB did not hold a 1-week deposit tender today, and so the O/N deposit facility, which is tendered every day now, has simply replaced the former, as the main sterilisation instrument. By this, the MNB has kept its word given on September 27 that it would not raise the base rate any further, but the main sterilisation rate still jumped to 18%. The somewhat complicated situation, as regards the placement of various elements of the banking sector's HUF liquidity, is as described in the following table: Actually, this refers to yesterday's status. Today, all the 1-week deposits and the limited amount of 1-week bills have matured, and the bulk of the proceeds from them has gone over into O/N deposits, the stock of which has risen to HUF3475bn. On the latter, the MNB pays an annual interest rate of 18%, whereas on reserves it pays the 13% base rate. Two-month deposits are paying 14.14% and 14.36%, according to the results of the so far two tenders held to offer them. This is still not a very clear picture, as regards exactly how the BUBOR yield curve should look now. But it is pretty clear that the main sterilisation rate is 18%, and that must have an overriding power over all the other sterilisation instruments, except mandatory reserves, which is a matter of administrative requirement.