The MNB raised 30bps... or maybe more (?)

HUNGARY - In Brief 16 Nov 2021 by Istvan Racz

The Monetary Council held its monthly rate-setting meeting in a difficult situation, but its decision largely met the challenge.In response to the nearly runaway mode inflation took in October, the MNB took the following decisions:1. It raised the base rate and the interest rate corridor by 30bps, the base rate going to 2.1%. (Analysts did not have a prior consensus view, expecting the rate hike within the unusually wide range of 15-100bps. But based on HUF market reactions, it looks like the predominant market view was the expectation of more than +30bps.)2. It has been announced that the base rate and the one-week deposit rate may once again differ from each other. (This implies that the effective immediate rate hike may prove to be bigger than 30bps, but the market will know that only on Thursday morning, i.e. ahead of the next 1-week tender, the earliest. Another aspect is the flexibility for the MNB to react to macro and market events quickly, by setting the effective sterilisation rate on a weekly basis.)3. The MNB is closing down its HUF-liquidity-generating FX swap instrument as of today. (In fact, the MNB has not been selling any new swaps as of late, thereby reducing the size of forint liquidity in the system, as the old swap contracts were expiring. Cancelling the facility is just the official announcement of an already existing practice. At present, some HUF800bn of such swap contracts are still outstanding, and all of those will expire within the next 12 months.)4. The MNB is going to introduce a new discount bond instrument from December, with a maximum maturity of one month. (This must have to do more with volatility than with permanent withdrawals of HU...

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