The MNB base rate is being further demoted

HUNGARY - In Brief 19 Jul 2016 by Istvan Racz

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For a longer while now, Hungary's central bank has been making remarkable efforts to reduce the significance of its own base rate, in order to gain more flexibility by avoiding potential negative political consequences if at some point it needs to raise the effective level of interest rates on the money market. The most recent example for this was the announcement on July 12 that from August, the MNB will limit the frequency of 3-month deposit tenders from weekly to monthly, and from October, it will start to limit the quantity of 3-month deposits that can be placed with the Bank at any tender. Officially, all this is done to continue squeezing bank liquidity out of the MNB's balance sheet, driving it towards the government bill and bond market and towards lending to the economy. Unofficially, this is an attempt to press short-term interest rates / yields further down towards zero and, perhaps even more importantly, to get a further tool to prevent the forint from appreciation against the euro, on the basis of the existing robust external income surplus.And it works, for now at least. In exactly a week from the announcement, government debt yields between 3 months and 3 years fell by 15-24 bps, to 0.55-1.42%. Today's 3M auction was especially spectacular, as the marginal (lowest) accepted yield fell to 0.52%, after which the secondary market yield dropped to 0.55% from yesterday's 0.68%. In addition, the forint, which was just trying to break out towards 313 against the EUR when the announcement was made, quickly retreated to EURHUF 315 and has stagnated around that level since then.Graph: Monetary sterilization by the MNB (stock data, HUF billions)Source: MNBClearly, ...