Nomura: MNB change in reserve rules loosens money supply
The National Bank of Hungary (MNB) has taken “another step towards monetary loosening by restricting the amount of reserves banks can optionally hold with it,” analysts at Japanese Nomura said in an announcement issued yesterday.
According to Nomura analysts, the step is expected to free approximately another HUF 200 bln to flow into the Hungarian government’s security market. “However, as HUF remains around 310 and with ECB QE extension on the way, we think that while the amount of money flowing out the curve remains low, the MNB will take additional steps including further quantity restrictions on access, greater duration swap discounts, possible base rate cuts and removing remuneration of required reserves . Our bias remains to be short HUF,” the announcement says.
Nomura says that the central bank “seems to have been implementing a continual series of easing measures, the last of which was the O/N deposit rate cut two weeks ago – moving from 0.35% to 0.1% and in the process removing the floor that was under the front end of the government curve. The intention to achieve the policy aims of lowering government funding costs, boosting growth and weakening the currency is clear to us – but the success of these is slow.”
Nomura’s analysts say that there is a “deep residual legal and logistical uncertainty” within local banks about their ability to keep up with the central bank’s activities. Therefore, “they have been slow to take up the duration swaps out to 10yr and have been slow to move beyond the very front end of the government securities curve (bills). The MNB is struggling to overcome this even in state-owned banks.”
At its non rate-setting meeting on Tuesday, the MNB “took another step … by adjusting the reserve rate requirement regime”, Nomura says. “The previous set-up was complex but, put simply, banks could set the level of reserves they wanted to hold between 2% and 5%. The MNB will now restrict banks to holding a maximum of 2% reserves at the central bank (at the base rate),” the announcement added.
Nomura said believes it is important to keep monitoring the MNB balance sheet as the “reserve account is currently around 15% of total bank funds held at the MNB and this move may free up around HUF200bn maximum that can flow into other instruments like the 3m depo or more likely into government securities at the front end.”
1: Breakdown of composition of bank access to MNB facilities. Dotted line indicates start of 3m depo and restrictions on access to 2w. (Photo: Nomura)
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