Monetary tightening is happening at last, slowly, slowly

HUNGARY - In Brief 04 Jun 2019 by Istvan Racz

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The MNB held the stock of its FX swaps unchanged at HUF1725bn yesterday. This was the third weekly tender in a row that the swap stock did not change, following the previous one-and-a-half months of steep reduction.The fact that the reduction of the FX swap stock has been stopped does not mean in our view that the MNB are softening their policy again. On the contrary, it looks like they have reached the point at which their measures carried out so far are starting to have a real impact on money market rates.In sum, the Bank have reduced their FX swap stock by a total HUF264bn since the announcement of the measure on March 26. As a result, the unsterilised liquidity of the banking sector has been essentially halved, falling by HUF375bn to HUF373bn between end-March and end-May. The sterilisation ratio (the ratio of sterilised liquidity to total HUF liquidity in the MNB's balance sheet) jumped to 43% at end-May from only 24% at end-March. And finally, BUBOR is starting move at last: the O/N rate has risen by 14bps to 0.1% and the 3-month rate by 6bps to 0.19% (June 3 data) since March 26, the start of the ongoing adjustment.All this may look too slow, too little compared to the existing threat of rising domestic inflation. Yet it explains a lot about why the MNB have stopped the withdrawal of FX swaps in the last three weeks. They have simply reached their Q2 policy target in this regard, which was cutting unsterilised bank liquidity by HUF100bn to HUF300-500bn as a quarterly average, and now they are most probably waiting for the June 25 Monetary Council to set further directions, depending on the findings of the simultaneously discussed quarterly inflation report.