(Source: Nomura)

“We think something around 0.70% makes sense through the end of December, with downside risks from possible policy changes to reserve requirements and rates, a possible policy rate cut and because the MNB’s fine-tuning facility has yet to be announced,” analysts of Nomura say in the report. 

Immediately after the MNB’s Monetary Council made its decision to put a cap on 3M depos at HUF 900 billion, Nomura’s analysts said the ultimate ‘core’ of policy of the central bank was to provide further easing through lowering BUBOR.

According to Nomura, the Hungarian central bank is seeking to maximize growth in nominal output, both as an inflation targeter with the aim of higher inflation and as a growth targeter, the latest report says.

“To achieve this, you can change the pace of money growth or you can change its velocity. In a fractional reserve banking system, money growth occurs naturally with more loan growth (the MNB wants to achieve greater output growth) and velocity growth occurs through using excess liquidity from the central bank’s facilities to provide new loans instead, ending up in a closed banking system back in the MNB as O/N deposits, or in the MNB’s specific case in the preferential depo facility and then the reserve account as well,” Nomura’s analysts say.

“BUBOR will likely trade around the blended access rate or slightly below it, with market expectations of future drops in this blended rate. Indeed, because liquidity spikes in future will pass through BUBOR, ending up in the O/N window, the skew in risks around BUBOR is to the downside of the blended access rate,” analysts at Nomura expect.

While analysts at Nomura note that the cap will be kept in place by December, so BUBOR rates should glide down until then, with the cap possibly set to be lowered to HUF 750 bln for March, a decision which could be made as early as this October.