MNB: The forint can go wherever it wants

HUNGARY - In Brief 24 Sep 2019 by Istvan Racz

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The Monetary Council decided today to keep all interest rates unchanged and to RAISE the Q4 target for unsterilised bank liquidity to HUF300-500bn, i.e. by HUF100bn from the Q3 target. At a press conference following the release of the communiqué, the Bank said that they are not at all worried about the existing weakness of the forint, and they continue not to have any target as regards the EURHUF exchange rate. Instead, they continue to expect a deceleration of domestic growth, in response to the weakening European cycle. The Bank's new inflation forecast sees adjusted core inflation and the headline CPI-inflation rate to have peaked already at 3.5% yoy and 3.7% yoy, respectively in Q2 2019, which they expect to be followed by further moderation towards the 3% target at lower levels than previously predicted.Translating this into policy specifics, they have just said that the forint may go wherever it wants, and that they are prepared to sell forints through FX swaps in Q4 if it is required to meet their increased liquidity target. This can be easily the case, given the increasingly negative fundamental balance of the BOP.The Council's decision was fully in line with the broad analyst consensus as regards interest rates, but not so much as regards the liquidity target. Indeed, there were analysts who expected a loosening of policy today, but they did not appear to be the majority of analysts speaking on the subject. I.e. the decision was more dovish than expected but not really very much more dovish, in our view.Needless to say, especially in the light of what we wrote in yesterday's in-brief, that we do not share the MNB's optimism regarding the inflation outlook. Th...