Today's Monetary Council meeting went (almost) exactly as expected

HUNGARY - In Brief 28 Feb 2023 by Istvan Racz

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The Council did not change the base rate (13%) and the interest rate corridor(12.5-25%) today, and it specifically said that the O/N deposit rate (18%) also remains unchanged, and  it will remain so for a while in the future as well. The Council made decisions on two issues: 1. The Bank will continue to sell FX to energy importers off-market; and2. Regarding banks' mandatory reserve ratio, which is being doubled from 5% to 10%, and banks can opt for an additional 5%, from April 1, according to a late-January announcement, the Bank will pay no interest on the first 2.5% tranche, it will the base rate, just as so far, on the tranche from 2.5% to 10%, and it will pay the O/N deposit rate on the whole of the optional part. Footnote on 1: Initially the off-market sales of FX to energy importers was thought to need the commitment of €1.5bn monthly. As energy prices have fallen greatly, the monthly cash requirement appears to be around €0.8bn only now. But as the C/A balance, and moreover, the external financing balance, is coming close to zero, because of lower energy prices, the off-market sale of FX to energy importers may leave the market with a small surplus of FX (the non-energy balance), as far as the fundamental part of the BOP is concerned. This will be obviously forint-positive. Footnote on 2: Doubling the mandatory reserve ratio to 10% means that HUF4000bn out of the total HUF12000bn of HUF liquidity will go into reserves, and this may go up to HUF6000bn or half of the total liquidity stock if banks opt for the maximum 15% reserve ratio. This will reduce the need to roll over a very big amount of O/N deposits every day, which would be good both for the MNB and for ...