No further steps from the MNB to tighten liquidity today

HUNGARY - In Brief 24 Feb 2020 by Istvan Racz

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At today's weekly FX swap tender, the MNB sold HUF 77bn of new swaps, implying that the stock of outstanding swaps will remain essentially unchanged at HUF 1942bn, given an almost equal amount of maturities. This seems to mean that the Bank intends to refrain from further steps to tighten liquidity for the time being, and further it suggests that the Bank is momentarily happy with the existing EURHUF 335-340 trading range.This came after five weeks of systematic reduction of liquidity through FX swap tenders. A sort of minor turning point appears to have been a Reuters report of February 19 on an informal meeting with local banks, where the MNB allegedly warned banks that the rise of money market rates seen in the preceding few days was excessive in their view. By saying this, the MNB essentially indicated that it was not preparing to carry out more tightening from that point onwards. On the trading day immediately prior to that meeting, 3-month BUBOR was at 0.63%, almost half a percentage point higher than at the outset of this year. Since then, BUBOR has not risen any further - indeed it has corrected slightly back to 0.6% today - and the MNB has not carried out any further tightening. EURHUF seemed to have stabilised around 335-337 in those days, and it has corrected upwards just slightly, to 338-339 by today.The MNB's problem is that it certainly does not want money market rates to rise further and to get in conflict with the 0.9% sterilisation rate. In addition, on February 19 the MNB reportedly also warned that any increase in 3M BUBOR will necessarily raise the interest cost of flexible rate bank loans, which are typically based on the use of that indicator, wit...