MNB Raises O/N Collateralised Lending Rate by 950 bp to 25%

MNB

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The Monetary Council of the National Bank of Hungary (MNB) on Friday announced a decision to raise the rate on the central bank's overnight collateralized loan by 950 bp to 25%, according to a report by state news wire MTI.

The decision is effective from 8:45 in the morning on Friday, October 14.

The council also decided to suspend the central bank's one-week collateralized loan.

The council left the base rate unchanged at 13%. 

"In the current turbulent period in financial markets, a key task for the [MNB] is to ensure market stability, in addition to meeting its primary objective of price stability. MNB stands ready to intervene using every instrument in its monetary policy toolkit to ensure these. The existing challenges warrant the use of targeted and temporary instruments," the council said.

From October 14, MNB will announce T/N foreign exchange swap instrument and O/N deposit tenders on a daily basis "at higher interest rate levels than before", the council said.

The instruments are designed "to ensure the rapid and flexible implementation of tighter monetary conditions in the sub-markets considered key in terms of monetary transmission", that is, on both the interbank market and the swap market, the policy makers added.

MNB Commits to Meeting FX Needs for Energy Imports

The central bank said it "commits to directly meeting major foreign currency liquidity needs" arising from covering energy imports "in the coming months".

MNB noted that as current account items, other than the energy balance, are already positive overall, the measure will have "a substantial impact" on the supply and demand conditions in the foreign exchange market.

"MNB continuously assesses economic and financial market developments and will continue to use these instruments as long as warranted to maintain market stability," the central bank said.

At an online press briefing, MNB deputy governor Barnabás Virág acknowledged the forint's "sensitive reaction" to the worsening international environment, including increasing risk aversion and higher commodities prices. He said FX exchange necessary to pay for energy imports as well as positions against the forint are contributing factors to the currency's weakening, adding that both factors had started "working in the same direction" a week earlier.

He said the central bank's 13% base rate is "capable of managing fundamental inflation trends", and that measures the MNB has taken to soak up banking sector liquidity have improved monetary policy transmission. The next phase of the efforts to keep monetary conditions tight and improve monetary policy transmission will allow the MNB to react to market changes to risk premiums in the fast-changing wartime environment with the help of flexible instruments, tenders, and FX swap instruments, he added.

Virág said the T/N FX swap instrument would be announced with a rate of 17% and the O/N deposit with a rate of 18%. He added that the central bank would cover the "lion's share" of the FX needed to pay energy imports "until the end of the year".

Commenting on the release of September inflation data, he said CPI for the month was "fully in line" with MNB's projection, while core inflation was "lower than expected". Inflation may "rise slightly" in the coming months, but "internal and external factors show the turning point is approaching", he added.

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