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The prospects for Hungarian monetary policy will also be discussed at the Budapest Economic Forum conference on October 8.
The results of the MNB’s week-long deposit tender will be released at 3pm, but today’s tender has already been posted on the central bank’s website. The novelty of this is that instead of the previous 0.6%, the central bank accepts offers at an interest rate of 0.75%, that is,
interest rates practically raised.
All of this is considered a tightening because in recent months the one-week deposit has been the effective guiding instrument, that is, its interest rate is the determining factor. This has always been the same as the base rate, now for the first time there is a discrepancy. It is not yet known how many deposits will be accepted, the central bank previously promised to accept all the offers submitted. The accepted amount will be announced at 3pm.
What is this one week deposit? In the public consciousness, perhaps, it is still believed that the central bank’s most important tool for determining market interest rates is the base rate. In reality, however, it is already this has not been the case for a long time because the central bank influenced the interbank interest rate with active liquidity management instruments. In this now important change for us, in the capital market turbulence of the first wave of the coronavirus epidemic, the central bank introduced the one-week deposit instrument.
Although the MNB did not promise it forever, in practice so far it has had unlimited access to the market with this instrument and has achieved the unlimited withdrawal of excess liquidity from the banking system. The emergency instrument has thus become the main instrument for influencing interest rates in monetary policy. The interest rate is not fixed at a meeting of the Monetary Council, but the Board of Directors decides weekly the day the deposit is announced.
Until now, the central bank has never deviated from the base rate level, so it was never a surprise. But now yes.
By the way, the MNB Monetary Council decided two days ago to keep the base interest rate at 0.6%, but even then it was emphasized that the decision on the one-week deposit would still be made weekly.
Therefore, the current decision is unprecedented, and its spice is given by the fact that two days ago the central bank left the base rate (and the interest rate broker around it) unchanged. However, the move is not entirely surprising, as the continued weakening of the forints, the closing of long forints and the growth of short-term stocks, as well as expectations of interest rate hikes arising from the FRA , put increasing pressure on the central bank. It should be noted that today’s interest rate hike de facto nullifies half of the interest rate cuts implemented in the summer months.
With today’s decision, the MNB has been able to react to the weakening of the forint in recent days, weakening against the euro this morning close to the all-time low for the Hungarian currency.
Cover image: Shutterstock
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