Always tricky: central bank policy is tighter than it looks

HUNGARY - In Brief 25 Jun 2019 by Istvan Racz

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Comparing today's policy statements with actual MNB activity, one might come to the conclusion that the central bank is secretly tightening its policy, in spite of its contrary talk.On the one hand, today's Monetary Council meeting, the key quarterly rate-setting event as declared by the Bank recently, concluded without any increase in interest rates, despite the fact that the new inflation forecast expects above-target headline inflation rates for the next three years and above-target adjusted core inflation for the next two years. They have left even the ridiculously low -0.05% O/N deposit rate unchanged, stressing the risk of the weakening global and European economies, prospective monetary loosening by major central banks, the yet unknown consequences of counter-cyclical fiscal policy and the impact of MÁP+, the government's new retail bond instrument on the saving behaviour of the domestic household sector. Besides, their communiqué stressed the importance of the recently initiated two refinancing programs, the NHP Fix, started for SMEs in January and the NKV, the MNB's corporate bond purchasing scheme that is just going to start in July. And finally, the MNB in fact added HUF150bn to its existing stock of FX swaps last week, to generate fresh liquidity for a 7-day period, to avoid an undesired increase in money market rates. All this clearly falls short of widespread expectation of at least some policy tightening, in view of rising domestic wage inflation pressures.But on the other hand, the MNB announced a further reduction of the average quarterly stock of unsterilised excess liquidity by HUF100bn, to HUF200-400bn as a quarterly average in Q3. In fact, unsteril...