MNI NBH Review - September 2023: Hawkish Tilt to Convergence Cycle Completion

Executive Summary:

• The NBH kept the base rate unchanged at 13% but delivered another 100bp cut to the one-day deposit rate, completing its rate convergence process.
• In its policy statement, the NBH stressed that monetary policy must remain “tight”. Deputy Governor Virag also struck a hawkish tone in his post-decision presser by saying the NBH will no longer be on “auto-pilot” with regard to rate cuts.
• The NBH’s simplified policy toolkit involves a symmetric rate corridor of +/- 100bps around the 13% base rate, which is now the central bank’s effective rate.

See our full review of the decision, with a summary of sell-side analyst views, here:

MNINBHRevSep23.pdf

The central bank held the base rate at 13% and cut the one-day deposit rate by 100bps to complete the first stage of monetary policy simplification. The cut as well as the measures announced by the NBH to simplify its policy toolkit were largely as expected, though the NBH stressed that monetary policy must remain “tight”, while Deputy Governor Virag said in his post-decision presser that the NBH will no longer be on “auto-pilot” with regard to rate cuts, striking a hawkish tone overall.

Going forward, the pace of future rate cuts is likely to depend on the rate of HUF depreciation, and therefore developments in the US and Europe will be eyed given the sensitivity of the local currency to the Fed and ECB’s rate paths. Stabilisation of the forint could facilitate the continuation of regular cuts given benign inflation developments. While sell-side all point to the importance of the HUF moving forward, there is no consensus among the views that we have analysed in this preview regarding the path of the base rate through the end of the year. Estimates range from a pause in October to continued 100bp cuts.

As part of the NBH’s simplification process, the O/N collateralised lending rate was cut by 250bps to 14% while the O/N deposit rate was reduced by 50bps to 12%, creating a symmetric rate corridor around the 13% base rate. From 1 October, excess reserves and the remunerated portion of required reserves will pay the base rate. The previous key tool, the one-day deposit rate, will cease to exist from the end of the month. Overall, the changes mean the base rate is now the primary instrument to track.