Central bankʼs 3M depo cap seen stricter than expected

MNB

MNB headquarters in Budapest (Image by Jessica Fejos)

While the market almost unanimously expected the Monetary Council of the National Bank of Hungary (MNB) to cap 3M deposit tenders for the last quarter of the year, the announced cap seems to be stricter than expected, according to analystsʼ reactions today.

Besides keeping the base rate at 0.9%, the MNB’s Monetary Council yesterday decided to reduce the maximum volume offered in 3M deposit tenders in October, November and December 2016 to HUF 900 billion forints in total. Though the decision to cap 3M deposits was widely expected, the “announced cap appears to be slightly stricter than expected by most market participants (with projections mostly suggesting levels not dropping below HUF 1-1.2 trillion),” an analysis issued by CIB Bank Hungary yesterday observes.

“The decision channels further liquidity into the interbank money market and partly also to the HGB market, resulting in further deviation from the MNB base rate at the short end of the curve," noted CIB analyst Sándor Jobbágy, adding that the latest data suggest that the current 3M deposit stock is HUF 1.629 trillion.

CIB attributes the decision to the central bank’s announcement in July of new measures affecting the policy instrument, which CIB tags as a clear shift of focus from the base rate.

“These latest unconventional measures essentially limit the availability of the 3M deposit and partly took effect from August – meaning fewer auctions – and will be extended from October – with a limited amount per auction,” the CIB analysis says.

BUBOR to determine the future

While the central bank states the next step for easing would be a lower cap, not rate cuts, the statement issued by the central bank after the decision did not provide thorough details on the form of a BUBOR intervention mechanism and FX is not mentioned. Analysts of Japanese Nomura said “much will depend on where BUBOR ends up in this new world.”

“As expected, the MNB will allocate limited access to 3M deposits through a multi-step system, first according to bank assets (as expected) and then according to a top-up based on accepting (or not) incremental allotments the MNB offers individual banks until there is a full allotment within the cap. However, this second step is unlikely to be used because of surplus liquidity in the system and the fact BUBOR will be below the 3M depo rate,” Nomura says in its analysis issued late yesterday.

According to Nomura, as the central bank yesterday failed to release information on how its BUBOR interventions – or “fine-tuning facilities,” as the MNB often calls them – will operate, the financial institution has “disappointed” pundits. Information is expected to be published during the next month, which Nomura sees as a key component. “We expect it to be some kind of window that holds the BUBOR rate at a set spread below the base rate decided by daily or weekly offers,” Nomura analysts say.

Forint depreciates as MNB may target weak currency

Following the central bank’s statement, the Hungarian currency  exhibited a rapid depreciation, and some pundits suspect this could be the target of the central bank in the longer term.

According to CIB, the first reaction to the announcement made yesterday was a rapid forint depreciation against the euro; however, it added, “the first jump from 308-308.50 in the morning to 310 was brief – half an hour after the release of the statement, the market hovered close to EUR/HUF 309.50.” The CIB analysis did not rule out a further weakening of the forint, however.

Nomura’s analysts see the decision of the central bank as a justification for easing monetary conditions further “because of the continued presence of disinflationary effects and persistent slack only easing gradually through the forecast horizon.” Behind the decision, Nomura’s analysts see “unstated reasons” of growth targeting and looking for a weaker currency over time.

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