Hungary’s central bank, the Magyar Nemzeti Bank (MNB), is ready to cautiously start normalising monetary policy from the present ultra-dovish stance, analysts said after the MNB's rate-setting meeting on September 18. The MNB will terminate its main unconventional easing measures, such as the interest rate swap auctions (MIRS) and mortgage note purchases by the end of 2018, a hawkish message sent to the markets.

The MNB has left the base rate at 0.9% on hold since signalling an end to an easing cycle at a policy meeting in the spring of 2016. Since then, it has turned to unconventional, targeted instruments to ease monetary policy further. 

The council also left the O/N central bank deposit rate at -0.15% and the O/N collateralised loan rate at 0.9%.

In a statement, policymakers said they had reviewed monetary policy instruments and were prepared for the gradual and cautious normalisation of monetary policy, which will start depending on the outlook for inflation. The set of unconventional instruments affecting short-term yields will be simplified and the set of unconventional instruments affecting long-term yields will be fine-tuned, they added

The central bank will leave its macro-forecast unchanged in the preliminary release of the quarterly Inflation Report due out on Wednesday. It sees inflation reaching 2.8% and economic growth 4.4% in 2018.

The council said it decided to phase out the three-month deposit, which is used as the main benchmark rate, by end of December 2018. In the future, mandatory reserves will be the main policy instrument. The interest rate on mandatory reserves and preferential deposits will remain equal to the central bank base rate. 

It also signalled plans to end two unconventional easing measures by the end of this year. It mentioned an updated target of HUF1.1 trillion (€3.39bn) for its interest rate swap programme, which implies a smaller HUF200bn volume of swaps for the fourth quarter than the originally anticipated HUF300bn. At present, MIRS stock stands close to HUF 935bn.

The mortgage bond purchase programme will be phased out in two stages: purchases on the primary market will continue until the end of the year and purchases on the secondary market until September 30.

The council said it would launch a new programme to "raise the proportion of long-term, fixed-rate lending to SMEs to an adequate level" early in 2019. The programme, dubbed "FGS fix", will launch with HUF1 trillion. In contrast with earlier phases of its Funding for Growth Scheme (FGS), the MNB will sterilise excess liquidity arising from lending under FGS fix by using a preferential deposit facility that pays the central bank base rate.

"This will contribute to developing a healthy structure for SME lending while having a neutral impact on liquidity developments," the council said.

In a separate paper outlining conditions of the FGS fix, the MNB said the interest rate of refinancing loans under the programme will be 0%, while the interest rate of SME loans disbursed by lenders will be capped at 2.5%. The currency of the new investment loans is limited to forints and the lending threshold per SME will be HUF1bn. Maturities of the new investment loans will be between three and ten years.

MNB deputy tones down hawkish statement

The deputy governor of the MNB, Marton Nagy, was quick to tone down what markets saw as a surprisingly hawkish announcement, saying the normalisation would not be immediate but contingent on the inflation outlook. 

The MNB still expects to reach the 3% inflation target in a sustainable manner in mid-2019, he said, adding that this “is not the phase of normalisation, only preparation for it”. First steps on non-conventional tools will be made. He reiterated that inflation remains the MNB's "single anchor". 

Commerzbank expects the MNB to take steps towards symmetry on the interest rate corridor over the coming quarter, and the depo rate to be hiked back into positive territory. Commerzbank sees the announcement by Hungarian policymakers as a shift to a more pre-emptive strategy, as the inflation tendencies would not have triggered such a prompt response. The forint, which hit an all-time low against the euro in June at 330, has not been under much pressure but it underperformed regional peers lately. Hungary’s real carry interest rate is the most negative among emerging markets, which the bank's analysts say is no longer a safe situation.