Central bank caps 3M deposits at HUF 900 bln

MNB

Photo by Jessica Fejos

The Monetary Council of the National Bank of Hungary (MNB) today decided to put a cap on the amount banks can place in three-month deposits, the central bank’s main sterilization instrument, at HUF 900 billion in the last quarter of the year, according to a statement issued today. Currently, the three-month deposit stock stands at HUF 1.629 trillion.

Today’s rate-setting meeting had been much anticipated by pundits, with anticipation 3M depo limits might be introduced. 

The MNB said it expects HUF 200-400 bln to be crowded out of the three-month instrument as the result of the expected contraction of banking sector liquidity for the rest of the year, due to autonomous factors and central bank programs, MTI reported. Yields on the interbank and government securities markets will fall as the liquidity is released, supporting the MNB’s economic and lending incentive as well as self-financing programs, the central bank added.

While the central bank said it is “striving” to distribute the volume offered at each tender evenly, it added that it reserves the right to deviate in light of ongoing liquidity developments. Allocation will take place in two rounds: the first based on balance sheet total and the second according to the principle of card allocation, MTI reported. Individual bank limits calculated on the basis of balance sheet totals will be reviewed on a quarterly basis.

In order to manage “considerable and persistent liquidity shocks”, the central bank said it is currently designing “fine-tuning instruments”; operative details will be decided in October.

The MNB added that it will keep monitoring the adjustment of the market to the limit on the 3M depos, with special regard to banks’ recourse to the central bank deposit and lending facilities, changes in interbank yields (Bubor) and developments in the government securities market, MTI reported.

A decision on capping the 3M depos applicable in Q1 of 2017 is due to be made by the central bank this December.

Before the central bank has made the decision, CIB Bank analysts said the “3M T-bills have been trading well below the policy rate for a long time now (the impact of the Self-Financing Program), but Bubor rates have started to adjust, too.”

An analysis put forward late yesterday by Nomura suggested the capping of 3M depo access could hint at future Bubor intervention. Nomura put the cap at around HUF 1 trillion before the announcement was made, saying that a lower number “would suggest more aggression, a higher number more caution.”

Base rate untouched 

As expected, the key rate of the central bank has been left intact at 0.9%. After the council signaled an end to an easing cycle at its policy meeting in May, and has since stood by its position on keeping the base rate on hold, the decision did not shake markets.

Rate setters also left the interest rate corridor, a band around the base rate that prevents extreme fluctuations of interbank rates, unchanged at the meeting today, Hungarian news agency MTI reported. The O/N collateralized loan rate, the top of the range, stands at 1.15%, while the O/N central bank deposit rate is -0.05%, MTI added.

Inflation to stay moderate

In a statement released after the meeting, the Monetary Council said inflation “remains moderate for an extended period”, according to MTI. “If the assumptions underlying the [MNB’s] projections hold, maintaining the current level of the base rate for an extended period, and the loosening of monetary conditions by the limitation of the deposit facility are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy,” MTI reported the council as saying.

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