MNB rate setters will be closely watched

MNB

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Despite pundits almost unanimously expecting the Monetary Council of the National Bank of Hungary to keep its key rate on hold at its rate-setting meeting Tuesday, the meeting will be closely observed as the central bank is expected to announce operational details of 3M depo limits, CIB Bank analysts said today in a weekly flash sent to the Budapest Business Journal.

The central bank announced new measures affecting the policy instrument in July, a clear shift of focus from the base rate, the flash says. “These latest unconventional measures essentially limit the availability of the 3M deposit and partly took effect from August (less auctions) and will be extended from October (limited amount per auction),” according to the analysis. 

CIB expects the central bank to make a decision on the operational details of the limit as well as the related auction technique and allocation mechanism next week.

According to CIB, banks today park approximately HUF 1.7 trillion at the facility, which the market expects could be cut down the about HUF 1 tln. “The access liquidity above the limit may find its way either to the FI market (short-dated T-bills) or to the Bubor market, putting downward pressure on market rates, hence supporting both the MNB’s Self-Financing Program and the lending market – at least according to the MNB’s expectations,” CIB says in the flash. Should the latter happen, lower Bubor rates would certainly be supportive, but from commercial banks’ risk and liquidity point of view the 3M MNB depo is far from being similar to corporate lending, hence limiting the depo facility on itself will not result in higher loan supply, according to CIB.

“Looking at market developments, 3M T-bills have been trading well below the policy rate for a long time now (the impact of the Self-Financing Program), but Bubor rates have started to adjust, too. Not knowing the concrete limit, the exact impact of the September announcement is hard to say at this point, but some further downward adjustment of Bubor rates can well be expected,” CIB concludes.

As expected, the MNB decided to leave the central bankʼs base rate on hold at 0.9% at a policy meeting on August 23. The decision of the council was expected as the MPC clearly signaled the end of its easing cycle in May, and matched the unanimous market consensus. CIB analysts said in a flash report released earlier that the central bank is expected to keep the base rate on hold at 0.9% for the rest of the year.

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