MNB: Long-term collateralised loans to banks discontinued from today

HUNGARY - In Brief 27 Jul 2021 by Istvan Racz

---

MNB vice governor Virág has just spoken on the Bank's YouTube channel. His main points were:- Today's 30 bps base rate increase implies that the 1-week deposit rate will go up by the same amount, i.e. the whole of the rate hike will be made effective. - From today, the MNB is not extending any more long-term (up to 5 years) collateralised loans to the domestic banking sector. (This is tangible and significant. In H1 this year, the MNB extended an average monthly HUF53bn of loans to banks through this instrument, which was about 11% of their total liquidity generation through QE policies.)- The MNB expects inflation (the headline CPI-inflation rate) to fall from June's 5.3% but to remain above the 4% tolerance ceiling for the rest of 2021. They expect inflation to return below that ceiling in Q1 2022 and to stabilise around the 3% target in the middle of next year. The inherent assumption on interest rates is one of distinct tightening on a continuous basis. (This forecast is not new: it is the same as the one given by the Q2 inflation report in late June. What is important is the stressing of the inherent interest-rate assumption.)- The MNB will carry out a review of its program to buy government bonds directly in August, by which time cumulative purchases will have reached HUF3000bn. No word has been said on any prospective reduction of purchases, though. (It would not be very timely to cut direct purchases of government bonds, just when banks' buying power has been reduced by closing down the LT collateralised loan instrument).All this appears to be somewhat more hawkish than we expected. As a minimum, the total base rate hike we have been expecting by mid-2022 (to 1...