MNB caps 3M depo at HUF 300 bln, holds base rate


MNB headquarters in Budapest (Image by Jessica Fejos)

The Monetary Council of the National Bank of Hungary (MNB) set a HUF 300 billion limit on the stock of three-month deposits, the central bankʼs main sterilization instrument, for the end of the third quarter at a policy meeting Tuesday. The council also decided to keep its key rate on hold at 0.90%, as expected.

Three months earlier, the Council set the limit for the three-month depo stock at HUF 500 bln for the end of Q2.

In a statement on Tuesdayʼs meeting, policymakers noted that they consider the extended set of monetary policy tools operating since July 2016 a success and consider the limit set on the three-month depos and its eventual future changes an organic part of the set.

The Council will take a decision on the three-month depo limit for the end of Q4 at a policy meeting in September.

The three-month depo stock stands at HUF 575 bln at present, of which HUF 350 bln will mature on June 21. On the same day, the MNB will offer another HUF 275 bln of these depos at a tender, information on its website shows. 

The MNB tenders the three-month deposits with a volume limit once a month.

The MNB made the three-month depo tenders less frequent last summer then started placing quarterly caps on three-month depo tenders last autumn in an effort to force more liquidity onto the market. The central bank has been using one-week, one-month and three-month EUR/HUF swaps, and, from March this year, six-month and twelve-month EUR/HUF swaps as other unconventional instruments for policy easing.

The total stock of EUR/HUF swaps stands at present at HUF 850 bln, including HUF 400 bln of one-month, HUF 300 bln of three-month, HUF 100 bln of six-month, and HUF 50 bln of twelve-month swaps.

Base rate kept on hold

The Council has left the base rate on hold since signalling an end to an easing cycle at its policy meeting at the end of May 2016. However, rate-setters have made use of "unconventional, targeted" instruments to ease monetary policy further. Besides placing a limit on the central bankʼs main instrument for sterilizing liquidity and introducing EUR/HUF swaps to provide forint liquidity, these measures also include modifying the interest rate corridor, a band around the base rate that prevents extreme fluctuations of interbank rates.

At the meeting on Tuesday, the Council left the interest rate corridor unchanged, with the O/N collateralized loan rate at 0.90% and the O/N central bank deposit rate at -0.05%.

In a statement released shortly after the meeting, the Council said that the 3% inflation target is expected to be reached and sustainable from the beginning of 2019, half a year later than earlier thought. 

Otherwise the Council repeated its earlier stand on keeping the base rate on hold "for an extended period," while staying prepared to ease monetary conditions with unconventional instruments.

"If the assumptions underlying the [MNB]ʼs projections hold, maintaining steadily the current level of the base rate and loose monetary conditions achieved through the change in monetary policy instruments for an extended period is consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy," according to the statement.

Downward risks to inflation have grown with the change in the external environment, the rate-setters said, then repeated their earlier position that "if inflation remains persistently below target, the Council will stand ready to ease monetary conditions further using unconventional, targeted instruments."

The condensed minutes of the meeting will be published at 2 pm on July 5.

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