Nomura: Hungary’s BUBOR seen falling further

Nomura issued its analysis after figures on Hungary’s inflation were published by the Central Statistical Office (KSH) last Friday.

“The lower BUBOR goes, the more head-scratching there appears to be in the market over the issue, especially given the global ‘reflation’ focus and CPI upside surprises in wider Europe,” Nomura analysts said, adding that they are not surprised and maintain their forecast for BUBOR going down further. “The problem with calculating BUBOR targets is that there is not a marginal rate given a fractured rates market. Banks have access to both the preferential depo at 0.90% and the O/N depo at -0.05% as (for a ‘normal’ bank) pretty near-perfect substitutes,” the analysis added.

Nomura has therefore switched to looking at alternative blended rates to assess where BUBOR should end up. According to the analysts, the HUFONIA (Hungarian Forint Overnight Index Average) Swap Index is being closely investigated by the central bank “as a more ‘real’ reflection of interbank liquidity and where it wants to see conversion. That is now trading at 16 bps, vs around 27 bps at the time of our last update on this issue at the start of December. Hence, on this matrix our BUBOR target has to fall further.”

Additionally to the fall of BUBOR, Nomura sees interbank depo rates falling further and “HUF implied rates should also fall back to the lows as the MNB liberates more liquidity in upcoming meetings, and hence we see the blended rate we are tracking fall back another 10 bps or so.”

Inflation seen further rising to yearʼs end

“The market appears to have got ahead of itself in the reflation story in Hungary. The MNB stands out globally in its tangential interest in managing liquidity in its own way and focusing on lowering BUBOR. There have not yet been the three separate moves this quarter to push more liquidity into the market to reach the HUF 750 billion end-of-quarter 3m depo target. That is still a significant HUF 150 bln to be liberated. As the preferential depo facility is approaching its cap, there will also be further downside pressure on BUBOR. On the flip side, T-bill rates probably cannot fall significantly further. Broadly however, we think the gap with HUFONIA and lower bank depo rates to come, meaning a lower wider complex of rates in the market, will allow BUBOR to fall,” Nomura explains.

According to the analysis, the latest CPI figures indicate that no additional headline monetary easing after March is necessary. “However, we think the jump from 1.1% y-o-y to 1.8% y-o-y on a mix of vehicle gas and food prices (i.e. non-core) is not that important for the MNB in wanting lower BUBOR and not seeing overshooting here,” the analysis adds.

This month’s MNB Monetary Council meeting is forecast to send a “strong signal that it is not concerned with one-offs in inflation and still sees inflation around or just below the center of the target in the long run,” Nomura anticipates. “Hence, we expect a more dovish tone than the market may be expecting after today’s CPI print. EUR/HUF around these levels (about 307) also should push that line, although the bank is not currently focusing on reserve usage for booking profit (and hence requiring a weaker HUF),” the analysts add.

MNB ʼhappyʼ with negative rates

According to Nomura, the Hungarian central bank is “perfectly happy” with increasingly negative real rates, given its view on reduced economic vulnerability.

“If it gets that from lower BUBOR it is happy. If it gets it from higher CPI inflation (while CPI remains within target in the forecast horizon) then it is happy. If it gets there with both at once it is twice as happy,” the analysis concludes.