MNB unhappy about BUBOR pace, Nomura says

Nomura acknowledged the central bank’s decision to keep its key rate intact during its Tuesday meeting, saying that it is not in the center of MNB’s policy matrix. On the contrary, Nomura believes the central bank is more concerned about the broader monetary conditions and 3m BUBOR in particular, according to the analysis.

“As such, the MNB continued to justify the continued further loosening of conditions with the slow recovery in inflation to the centre of target over the medium run and an output gap that seems to exist for an infinite period in its model,” the analysis said. The analysts claim the key new element of dissatisfaction could be the pace at which 3M BUBOR is falling. Nomura expects the central bank to target 3M BUBOR below 60.

“As such, the move it made was to further lower the upper end of the interest rate corridor to 0.9% for both the O/N lending and the 1W collateralized lending rates. We think originally the MNB was averse to closing that gap to zero, seeing it as potentially distortive – but has seen the need to signal a stronger move lower in BUBOR,” the analysis says.

3M depo the key

The central bank initially offered HUF 450 billion of 3M depo at Wednesday’s tender for HUF 690 bln maturing, Nomura says, reminding that they had only expected HUF 400 bln. “This means that HUF 237 bln of liquidity has been forced out of the facility and through the market after HUF 591 bln was forced out in October overall (or HUF 121 bln at the tender after that month’s Monetary Council meeting – the difference and complication is that it has moved from bi-weekly to monthly tenders),” the analysis says. “There is only HUF 36.8 bln that needs to be squeezed out of the 3M depo now to reach the MNB’s year-end target.”

According to Nomura, MNB might miss the target on the downside if it is still not happy with the level of BUBOR into year-end, as currently it would need to offer HUF 400 bln. “However, there is another liquidity event to watch first – the drop in the reserve requirement from 2% to 1% on December 1, which should liberalize HUF 172 bln into the market and would bring a total drop in MNB’s balance sheet for December to HUF 209 bln,” Nomura adds.

While Nomura analysts are still targeting 3M BUBOR below 60 bps through year-end and below 55 bps at end of Q1 next year (based on a further fall in the 3M depo cap target, which is expected to be announced in December), banks seem to be reluctant to lower BUBOR too much because of a 3-4 bps odd spread for credit and also because the average blended rate of access to MNB is not falling significantly as banks are not holding money in overnight, the analysis says.

Base rate cut ‘possible’

According to Nomura, another base rate cut could happen, which would “be the most effective means of loosening monetary conditions”, but is not expected before the end of this year. “At the same time, we have not seen lending meaningfully pick up yet. Therefore, we still think the MNB can announce a further FGS [Funding for Growth Scheme]-type measure in 2017, and a possible return to duration swaps and flattening of the curve. The MNB is happy that Hungary’s curve trades inside that of Poland, especially at the long end, but not how steep it is,” Nomura’s analysis adds.

What to watch next

The next liquidity events pundits will most certainly keep an eye out for include possible changes in the reserve requirement on December 1 and the 3M depo offering on December 21 following the next meeting of the central bank’s Monetary Council. For now, the council has “run out of other surprises because of the cut to the top end of the band this time – all that would be left is a cut to the O/N depo, currently at -5 bps, which we think the MNB will not do because of the risk it poses to banks,” Nomura’s analysis concludes.