The MNB was seen balancing between loose and tight today

HUNGARY - In Brief 26 Mar 2019 by Istvan Racz

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The MNB acted somewhat strangely today. It carried out its first tightening moves in seven years, by raising the O/N deposit rate by 10 bps, to -0.05%, and by reducing its target on the quarterly average excess liquidity of banks by HUF100bn, which should imply a HUF130bn reduction of the existing stock of FX swaps in Q2, according to the MNB itself. But the Governor hit a rather dovish tone at the press conference after the meeting, stressing that the MNB would maintain loose policies, the rate hike was only a one-time event rather than the start of a tightening cycle, and the like. Besides, the MNB launched today a HUF300bn program to buy domestically issued corporate bonds, with the aim of improving the efficiency of monetary transmission, etc, etc. The best way we could translate this latter into the language of ordinary mortals is that the Bank has decided to do some credit policy as well, in addition to creating an additional collateral base for its lending activities. And finally, the MNB has announced that it expects its favourite core inflation measure (core inflation adjusted for indirect taxes) to stay above its 3% inflation target for the rest of 2019, although never reaching 4%, and to edge back to the target level no sooner than in early 2022 (please, see the blue line on the chart below).What all this may have implied, in our view, is that investors (1) perceived the rate hike as the smallest possible meaningful measure; (2) some of them may have simply missed the tightening step affecting FX swaps (not their fault, the way it was communicated was not very easy to spot and understand, to say the least); (3) were taken aback by the Governor's surprisingly...