BUBOR appears to stabilize at 16 bps, Nomura says

“Since the MNB’s March meeting and the announcement of next quarter’s liquidity framework (lower 3M depo cap HUF 500 billion for end-Q2, and longer HUF providing FX swaps), BUBOR has fallen to its natural floor. Previously, we mentioned that we saw a 15-17 bps window for BUBOR, as we thought 12-15 bps represented the credit floor for the instrument. It now sits at 16 bps and has seen some stability,” Nomura analysts say.

However, Nomura observes that the Hungarian central bank has been moderately successful at flattening the FRA curve and narrowing the 6M-3M spread in BUBOR. “This spread was targeted by the MNB as a key part of the monetary transmission mechanism into converted FX mortgages (which mark off of 6M) and SME debt. While levels have declined, we believe the spread is the MNB’s new target,” the Nomura analysis says.

Q3 framework lined up

The upcoming meeting of the Monetary Policy Council (MPC) on May 23 is not expected to bring any major new announcements. It is highly likely the MPC will discuss the Q2 framework’s success and start considering any new steps needed to be taken before the following meeting, as it appears to be still too early to make decisions on the Q3 liquidity framework, which will only be announced on June 20.

The June 20 meeting, however, “may result in a modest fall further in the 3M depo facility, as well as more concentration on longer duration HUF providing FX swaps, and we think a HIRS 3YR swap is still a possibility. While 3YR IRS fell from around 86 bps just before the March meeting to 67 bps at the end of that month, it has now rebounded to 79 bps. We think the MNB prefers it to be around the lows instead. A 3YR HIRS would also drag down the front end,” Nomura’s analysts say.

Slowing CPI might ease pressure

Commenting on the slowing CPI growth reflected by the Central Statistical Office’s (KSH) recent figures, Nomura analysts speculates some perceived pressure is being taken off the MNB. At the same time, it might also indicate that negative real rates can be less dramatic than previously. Hence, room is available for the MNB to respond in a more aggressive policy, such as “an ultimate growth mind-set, but framed through well-behaved CPI inflation”.

“We believe annual CPI inflation will fall next week to around 2.2% for April from 2.7% previously, thanks to softening food price growth, but also a surprisingly slow rebound in core inflation, despite imported reflation and a tighter labor market locally. We continue to see strong upside risks in the medium run from core inflation on the reflation/tight labor market story. For now, we only see this as a risk to monitor and it is not a baseline in our forecast, as it has not materialised yet and the timing would be difficult to gauge. As such, we see inflation in the lower-half of the target band (for both core and headline) through much of next year,” the Nomura analysis explains.

According to Nomura, a “significant real rate shock to the market … may indicate that pressure on FX remains somewhat limited, even as the current account starts to turn.” Therefore Nomura expects “ECB indications on the outlook for tightening will be an important H2 kicker for a weaker HUF when the puzzle is completed and EUR/HUF can move higher.”