Reverse FX swaps rolled over today, likely base rate increase tomorrow

HUNGARY - In Brief 11 Jul 2022 by Istvan Racz

---

Last week, the MNB said that it may pull the base rate (currently 7.75%) up to the new level of the 1-week deposit rate (9.75%) already this week, rather than waiting for this month's regular rate-setting meeting on July 26. They most probably meant that this would happen at tomorrow's (Tuesday, July 12) non-rate-setting Monetary Council meeting. Given that the EURHUF rate was very unfriendly today as well (closing at 407-408), a base rate hike is now quite likely to happen tomorrow indeed. Once again, and we apologise for the repetition, as everyone has realised this by now, but the base rate's catching up with the actual interest rate - the 1-week depo rate, i.e. the effective sterilisation rate - is a symbolic measure only. Its message is confined to perhaps sending the positive signal that the MNB is now past the phase when it tried to use the coexistence of its two key rates to play games of market psychology, moving more slowly with the base rate, as if that had been seen as the more stable element of the Bank's weaponry, and the faster-moving deposit rate had been partly a matter of market volatility - in other words, the deposit rate could have occasionally moved back to lower levels when temporary market problems had faded. More simply, the message is that now the MNB has the clear view that the key interest rates can only move upwards and do so markedly under current circumstances. The other thing to mention is that Friday's reverse FX swap - the MNB selling €1588m for forints for three days - was essentially rolled over for another day, as the Bank sold €1580m at today's tender. Officially, the Bank is doing this to even out swap markets, and OK, we take tha...