Economy
INSTANT VIEW - Hungary c.bank comes up with new tools to flatten yield curve
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The National Bank of Hungary (MNB) has on Tuesday kept its base rate on hold at 0.9% and did not modify its overnight deposit or lending rates, either. However, it has announced two new unconventional policy tools, in a move that was expected by the market, only it was not sure about the timing.
“The decision to keep the three month and overnight deposit rates on hold at 0.90% and -0.15% respectively had been widely expected, but a move to loosen monetary conditions via unconventional policy had been signalled. In the build-up to today’s meeting, MPC member Gyula Pleschinger commented that the Bank has a “million ways" to ease policy. Market speculation had increasingly focussed on possible measures aimed at bringing down yields at the long end of the curve.
“In the event, the Council decided on two measures. The first was to re-introduce interest swap facilities with five and ten-year maturities. This move is designed to reduce commercial banks’ interest rate risk at longer maturities and should increase their demand for five-year and ten-year local currency government debt, bringing down yields at the longer end of the curve.
“The second (and potentially more controversial) measure announced was a mortgage bond purchasing programme, aimed at bonds with a maturity of three years or more. We don’t know any more at this stage and further details will not be provided until next month (date yet to be specified). But there are a couple of key things to watch for as more information is made available. The first is the scale of the mortgage bond purchases. In comments after the release of the statement, Deputy Governor Marton Nagy stated that the purchases could amount to as much as 50% of the mortgage bond market.
“The second is whether the purchases are sterilised. As things stand, the central bank conducts its sterilisation operations via the three-month deposit facility, but this is capped at just 75bn HUF and is being fully utilised. As a result, banks need to place excess reserves in the overnight facility, which counts as part of the monetary base. Unless the cap on three-month deposits is lifted, the central bank’s bond purchases would increase the amount of surplus liquidity in the banking sector, and increase the size of the monetary base. That would be a form of quantitative easing.
“A bond purchasing programme should support mortgage lending, which is struggling. Forint mortgage lending was contracting in year-on-year terms between 2016 and the middle of this year. And given that property price-to-earnings ratios are very low by past standards, there’s little immediate risk of a property price bubble inflating.
“That being said, it’s becoming increasingly difficult to square the MPC’s actions with the underlying macroeconomic environment. Hungary’s economy is bumping into capacity constraints. Wage growth is now above 13% y/y and, although headline inflation is relatively low, core inflation has risen markedly since the start of the year. It now stands at 2.7% y/y - not far below the National Bank’s central 3% target for headline CPI. Similar factors have either prompted central banks elsewhere in the region to start tightening monetary policy (Romania and the Czech Republic) or at least shift the tone of their communications in a more hawkish direction (Poland).
“Headline inflation will remain below the Bank’s target over the rest of this year, but we then expect it to rise above target in early-2018. Our central view is that the MPC will reverse course next year and tighten policy. But a change in tack is looking increasingly unlikely and there’s a growing risk that policy is kept too loose for too long. That could result in growing macroeconomic balances, a possible inflation shock and a nasty adjustment at some point further down the road."
“In its statement, published an hour later, the MPC preserved its dovish stance, emphasizing again that risks to inflation are tilted to the downside. They also added that the monetary policy of the ECB could remain accommodative, according to the council’s expectations.
“Despite the fact that long term yields have already declined, the Hungarian yield curve remained steep in international comparison, according to council members. As the council would like to see longer term yields at more depressed levels as well, they announced two unconventional monetary instruments in their statement.
“These are as follows: (1) Unconditional interest rate swap (IRS) facilities with five and ten-year maturities will be available for banks at regular tenders from 2018. The allocation amount was set at HUF 300 billion for 1Q18. (2) The MNB will launch a targeted program aimed at purchasing mortgage bonds with maturities of three years or more. No more details were released today on the new programs, the statement only said that operational details will be released in December.
“The above announcements were in line with our view, as we had expected targeted monetary policy measures to be delivered in the last two months of 2017. As a result of continuous policy easing, we stick to our forecasts that that short-term money market rates will arrive in negative territory, while - in line with the MNB’s intentions - long term bond yields could further decline, and the 10-year bond could drop to 2% and could remain at this level in FY2018. Currently, we see low probability of rates normalizing before 2020."
The National Bank of Hungary (MNB) has on Tuesday kept its base rate on hold at 0.9% and did not modify its overnight deposit or lending rates, either. However, it has announced two new unconventional policy tools, in a move that was expected by the market, only it was not sure about the timing.
Capital Economics, Erste.
Liam Carson, Capital Economics, London
“The Hungarian MPC left both its three-month and overnight deposit rates on hold today but the Council announced unconventional measures to ease policy, including interest rate swaps and a mortgage bond purchase programme. Further details of these measures will only be provided in December, but the big picture is that moves to loosen policy are at odds with mounting evidence that economic slack is diminishing rapidly. There is a growing risk of a destabilising build-up in macroeconomic imbalances and/or a sharp rise in inflation over a 2-3 year horizon.“The decision to keep the three month and overnight deposit rates on hold at 0.90% and -0.15% respectively had been widely expected, but a move to loosen monetary conditions via unconventional policy had been signalled. In the build-up to today’s meeting, MPC member Gyula Pleschinger commented that the Bank has a “million ways" to ease policy. Market speculation had increasingly focussed on possible measures aimed at bringing down yields at the long end of the curve.
“In the event, the Council decided on two measures. The first was to re-introduce interest swap facilities with five and ten-year maturities. This move is designed to reduce commercial banks’ interest rate risk at longer maturities and should increase their demand for five-year and ten-year local currency government debt, bringing down yields at the longer end of the curve.
“The second (and potentially more controversial) measure announced was a mortgage bond purchasing programme, aimed at bonds with a maturity of three years or more. We don’t know any more at this stage and further details will not be provided until next month (date yet to be specified). But there are a couple of key things to watch for as more information is made available. The first is the scale of the mortgage bond purchases. In comments after the release of the statement, Deputy Governor Marton Nagy stated that the purchases could amount to as much as 50% of the mortgage bond market.
“The second is whether the purchases are sterilised. As things stand, the central bank conducts its sterilisation operations via the three-month deposit facility, but this is capped at just 75bn HUF and is being fully utilised. As a result, banks need to place excess reserves in the overnight facility, which counts as part of the monetary base. Unless the cap on three-month deposits is lifted, the central bank’s bond purchases would increase the amount of surplus liquidity in the banking sector, and increase the size of the monetary base. That would be a form of quantitative easing.
“A bond purchasing programme should support mortgage lending, which is struggling. Forint mortgage lending was contracting in year-on-year terms between 2016 and the middle of this year. And given that property price-to-earnings ratios are very low by past standards, there’s little immediate risk of a property price bubble inflating.
“That being said, it’s becoming increasingly difficult to square the MPC’s actions with the underlying macroeconomic environment. Hungary’s economy is bumping into capacity constraints. Wage growth is now above 13% y/y and, although headline inflation is relatively low, core inflation has risen markedly since the start of the year. It now stands at 2.7% y/y - not far below the National Bank’s central 3% target for headline CPI. Similar factors have either prompted central banks elsewhere in the region to start tightening monetary policy (Romania and the Czech Republic) or at least shift the tone of their communications in a more hawkish direction (Poland).
“Headline inflation will remain below the Bank’s target over the rest of this year, but we then expect it to rise above target in early-2018. Our central view is that the MPC will reverse course next year and tighten policy. But a change in tack is looking increasingly unlikely and there’s a growing risk that policy is kept too loose for too long. That could result in growing macroeconomic balances, a possible inflation shock and a nasty adjustment at some point further down the road."
Orsolya Nyeste, Erste Bank, Budapest
“At its rate setting meeting today, the MPC kept the 3M policy rate at 0.9% and the O/N depo rate at -0.15%. The decision was in line with the Bloomberg consensus, however underdelivered compared to our projection, as we pencilled in a 5-10bp O/N depo rate reduction.“In its statement, published an hour later, the MPC preserved its dovish stance, emphasizing again that risks to inflation are tilted to the downside. They also added that the monetary policy of the ECB could remain accommodative, according to the council’s expectations.
“Despite the fact that long term yields have already declined, the Hungarian yield curve remained steep in international comparison, according to council members. As the council would like to see longer term yields at more depressed levels as well, they announced two unconventional monetary instruments in their statement.
“These are as follows: (1) Unconditional interest rate swap (IRS) facilities with five and ten-year maturities will be available for banks at regular tenders from 2018. The allocation amount was set at HUF 300 billion for 1Q18. (2) The MNB will launch a targeted program aimed at purchasing mortgage bonds with maturities of three years or more. No more details were released today on the new programs, the statement only said that operational details will be released in December.
“The above announcements were in line with our view, as we had expected targeted monetary policy measures to be delivered in the last two months of 2017. As a result of continuous policy easing, we stick to our forecasts that that short-term money market rates will arrive in negative territory, while - in line with the MNB’s intentions - long term bond yields could further decline, and the 10-year bond could drop to 2% and could remain at this level in FY2018. Currently, we see low probability of rates normalizing before 2020."
