Analysts eye MNB’s 3M depo

According to Nomura, the MC is focusing not on the base rate but “elsewhere,” arguing that it believes that “monetary conditions still need to be loosened, but wants stability in the base rate for political reasons.” The MC “still views managing the monetary system via directing liquidity and causing BUBOR to fall further as more effective. Hence the macro outlook of contained inflation (below the top end of the band), HUF fairly volatile but broadly on the strong end of this year’s range, and growth on the soft side,” the analysis by Nomura says. 

According to Nomura, the council has probably run out of room at this meeting to reduce the upper end of the corridor further. “It now stands at 1.05% vs. the 0.90% base rate. A 5 bps move could be technically possible, but we think the MC would then consider it to be too close to the base rate for efficient monetary operations. A cut in the O/N depo rate (currently -0.05%) is technically possible but we think the MNB is opposed to this and sees a more negative rate as damaging to the banking sector,” Nomura’s analysts say. “In addition – as we will see below – we have seen more money flow into the preferential depo facility rather than the O/N depo, which makes rate cuts to the lower rate less impactful.”

Consequently, Nomura stresses the importance of liquidity, which triggers the importance of the monthly offered 3M depo tender scheduled for Wednesday, along with the HUF and FX tenders the MNB has been undertaking on occasional Mondays.

“The first new, constrained 3M depo tender (after last month’s MC meeting where the December 3M depo volume target was set at HUF 900 bln) came in at only HUF 150 bln offered, and in the end only HUF 100 bln was accepted. This shifted a substantial amount of new money out of the MNB,” the analysis says. “True, there were timing issues with more money locked up at the unconstrained September 3M depo tender – but that is locked up until December. Hence, on Wednesday we expect there to be another very low offer (maybe the same as last time) and again a low accepted amount. December can then be set (as a policy choice announced possibly at the December MC) to bring in the overall volume at HUF 900 bln or lower at the end of the year.”

Nomura analysts expect a lower, probably HUF 750 bln target for the end of March; however, it is still early to make such an announcement, the analysis adds. “Indeed, the fall in BUBOR from 11 bps to 22 bps below the base rate suggests the existing policy is heading in the right direction, and we expect it to base out around 60-65 bps through year-end before falling (under a tighter depo cap) to around 55-60 bps at the end of Q1.”

Nomura is keeping an eye out for other possible changes this week, as the last meeting saw a significant cut in reserve rate requirements from 2% to 1%, which the MNB calculated would liberalize HUF 170 bln into the system. No further changes are anticipated by Nomura at tomorrow’s meeting, however, and may only come after this shift has occurred at the start of December.

“Overall, we expect the MNB to remain on the same path of easing monetary conditions through whatever means necessary. We have seen very little official commentary on HUF in recent meetings,” Nomura adds. “We believe the MNB will be unhappy that PLN has sold more than HUF and so we think some comment or suggestion (more likely in press comments in the days after, as opposed to the statement) may well occur.”