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Natwest Markets on NBH Minutes/Hungarian Forint

HUNGARY
  • HUF continued to sell-off Wednesday, reaching another all-time low against the EUR. The NBH minutes reflected some rueful wishful thinking on behalf of monetary authorities. Rationalising its decision to end its rate-hiking cycle, the NBH described conventional rate hikes and liquidity draining operations as almost interchangeable "pillars" of monetary policy.
  • Early results of the discount bill auction and long-term deposit have been mixed. The latest operation saw only HUF 2bn of bids out of HUF1tn on offer.
  • However, a failure to drain more significant amounts of liquidity is not the NBH's biggest problem. The problem is that it failed to convince currency markets which are now punishing HUF for the central bank's perceived premature exit from tightening. The more the currency depreciates, the more rates markets price in that the NBH will be forced back into interest rate hikes.
  • FRAs are now pricing in 131bps of NBH rate hikes and a terminal rate 145bps higher than what it expected prior to the NBH's decision to end its hiking cycle. Tomorrow's second discount bill auction will be a market focus. Limited uptake of the auction and continued currency depreciation could force the NBH back into tightening.
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