The MNB made a small step to move away from its expressed loosening bias

HUNGARY - In Brief 29 Mar 2017 by Istvan Racz

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Yesterday's Monetary Council meeting did not bring about any dramatic policy change, just as generally expected. Yet there was change, if only a small one. Interest rates unsurprisingly remained untouched, and the Bank delivered its Q1 target of reducing the stock of 3-month deposits to HUF750bn. At today's tender, HUF350bn was accepted in new deposits against HUF526bn of bids, resulting in some further de-sterilization pressure on banks. The end-Q2 target was set at HUF500bn, i.e. HUF100bn less than the amount expected by analysts on the market. But the Bank stressed that its targeted quarterly reduction will likely not raise the amount of excess liquidity, as autonomous factors are expected to reduce the amount of total liquidity in the system by the same amount. In addition to the existing three FX to HUF swap facilities, the Bank announced two new ones yesterday, for 6 months and 12 months, saying that the volatility of liquidity in the banking system, mainly due to variations in the government sector's cash flow, may require the use of those new facilities as well.The MNB's new quarterly inflation forecast (see on the chart above) kept the headline CPI-inflation rate within the Bank's 3% medium-term target for the whole of the next 12 quarters, which may not look 100% credible in the light of the recent upswing of inflation and of the developing massive upward pressure on wages. But the MNB may be partially right on this, given the likely settling down of the recent recovery of fuel prices, the high probability of the continuation of a substantial or even increasing household savings ratio as wages rise, and the likelihood that higher consumer demand will primaril...