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Hungaryʼs central bank not stepping in to strengthen forint

MNB

The Monetary Council of the National Bank of Hungary (MNB) decided to keep the MNBʼs key rate on hold at 0.90% at a monthly policy meeting on Tuesday. In the meantime, it does not seem concerned at the weakening of the forint exchange rate.

The Council also left the O/N central bank deposit rate at -0.15% and the O/N collateralized loan rate at 0.90% at the meeting on Tuesday. A flash analysis by CIB Group said the move was in line with the market consensus and its own expectations.

The Council has left the base rate on hold since signaling an end to an easing cycle at a policy meeting in the spring of 2016. However, rate-setters have made use of "unconventional, targeted" instruments to ease monetary policy further.

The forint weakened abruptly last week, reaching its lowest exchange rate in the last two years on Monday, at 319.26 to one euro. It strengthened somewhat on Tuesday, closing at 316.65. 

Given the efforts of the MNB to keep the exchange rate stable, some were expecting the central bank to make statements that will move back the HUF/EUR rate below 310, as it has been for a long time.  This has not happened, probably because the weakening was not sudden, but continuous, albeit slowing recently.

CIB said the statement was "moderate and brief" when commenting on the market situation. It cited the MNB as saying :"In the current volatile financial market environment, the fundamentals of the Hungarian economy continue to be stable. The country’s external debt has declined significantly, and its net lending position continues to be strong. Its fiscal position is sustainable, the budget deficit is low, the government debt-to-GDP ratio is contracting, associated with a significant decline in the foreign currency debt ratio." This "confirmed that the central bank’s view agrees that no internal drivers are behind the market movements," CIB added. 

The research department of CIB Group concluded: "As long as we see the correction of the current market movements and a drop in volatility, we would continue to expect no change in the base rate or the O/N deposit interest rate within the foreseeable future. Taking into account the domestic fundamentals and the external environment, the normalization of loose monetary conditions may begin in 2019 at the earliest. However, a revision of this outlook would be warranted based on the expected forthcoming ECB guidance related to their post-QE monetary policy ."

Staying loose

In a statement released after the Tuesday meeting, the Monetary Council said that "maintaining the base rate and the loose monetary conditions at both the short and long ends for an extended period is necessary to achieve the inflation target in a sustainable manner," echoing the policy stand voiced in previous months.

However, in a slight change to its earlier statements, the council made references to "the current set" of monetary policy instruments, rather than "the extended set," perhaps suggesting that it has no plans to add to that set of tools, noted state news agency MTI.

"In line with the councilʼs forward guidance, the current set of instruments contributes efficiently to the maintenance of the loose monetary conditions over a prolonged period and to an improvement in financial stability," it said. "The council will closely monitor developments in monetary conditions and will ensure the persistence of loose monetary conditions over a prolonged period by using the current set of monetary policy instruments," the policy makers added.

Commenting on the newest of these policy instruments intended to flatten the yield curve, the council said the MNB would continue mortgage bond purchases and its monetary interest rate swap (MIRS) facility "continuously and for a prolonged period", calling them "an integral part" of the set of monetary policy instruments.

The MNB noted that it bought mortgage bonds amounting to more than HUF 150 billion by the middle of May. Transactions on the primary market accounted for more than one-third of total purchases, it added. As a result of the purchases, the spreads of mortgage bonds over government securities yields "fell sharply and turned negative on average."

The decline in financing costs encouraged issuance on the primary market, which supported an increase in fixed-rate lending, the Council noted.

The council added that it focuses on the relative position of domestic long-term yields relative to international yields when evaluating the MIRS and mortgage bond purchase programs.

The abridged minutes of the policy meeting on Tuesday will be published at 2 p.m. on June 6.

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