Base rate hike was combined with quantitative measures to reduce banks' forint liquidity today

HUNGARY - In Brief 30 Aug 2022 by Istvan Racz

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The Monetary Council held its monthly rate setting meeting today. Unsurprisingly, it raised the MNB base rate further, by 100 bps to 11.75%. Accordingly, the interest rate corridor went up by 100 bps as well, to 11.25-14.25%. The 1-week deposit rate will most likely be raised by the same amount and to the same level as the base rate at Thursday's weekly deposit tender. In addition, the Council decided to introduce three new quantitative measures to (1) tighten further by forcing short-term yields/rates to catch up more with the MNB base rate/deposit rate (2) offer a longer-term sterilisation facility. These are: (a) a higher mandatory reserve ratio; (b) regular issues of discount bonds, and (c) a longer-term deposit facility. All these should increase flexibility, strengthen capital flows in the BOP, reinforce financial stability and reduce somewhat the cost of monetary sterilisation. The amount of HUF liquidity in the banking system, which needs to be sterilised regularly or on a durable basis, is around HUF10000bn. This amount will not decrease at all, as a result of the new measures/facilities. But the new system for the mandatory reserve ratio will place much of sterilisation on a daily basis, rather than weekly as is currently the situation. The mandatory reserve ratio will go from 1% to 5%, and this will have to be met by banks daily. On top of that, banks will be able to opt for an even higher reserve ratio, allowing them to place deposits with the MNB, up to a certain limit, on a daily basis. The interest rate/yield on all three facilities will be linked to the base rate. This does not necessarily mean they will be the same as the base rate, but it means that t...