(Bloomberg) -- The Hungarian central bank’s policy overhaul is leaving analysts confused over the outlook for the forint and monetary conditions.
Rate setters opened the way to higher short-term borrowing costs on Tuesday, while also announcing government bond purchases and extending credit to companies, tightening and easing financing conditions at the same time.
The move also leaves in place a framework that allows the central bank to set a different interest-rate on one-week deposits each week. After acting like one of the most dovish central banks worldwide in recent years, that kind of flexibility may dent its message on tightening.
| Announcement | Rationale |
|---|---|
| Widen rate corridor to range of -0.05%-1.85% | Allows short-term rates to fluctuate in wider range and combat forint depreciation |
| Set one-week deposit rate at weekly tenders | Allows flexibility to steer money-market rates amid a volatile economy |
| Announce start of government bond purchases | Helps stabilize bond market after failed auctions |
| Boost credit to firms via corporate bonds, loans | Helps support an economic recovery from the coronavirus |
The announcement follows zig-zagging policy decisions in recent weeks that included a pledge to boost liquidity by as much as $29 billion forint, then efforts to drain surplus cash in the economy to support the forint.
The forint extended a recovery from a record low against the euro, while bond yields tumbled.
“The NBH promised many things over the past months and it failed to deliver: It needs to stick to its commitment and it should not change its strategy rapidly,” said Guillaume Tresca, an analyst at Credit Agricole SA in Paris. “The monetary policy is still too complex with too many tools. It’s trying to be smart, but everything is hard to understand. They need a clear direction and this is not yet the case.”
Here’s a roundup of analyst views published after the meeting:
KBC Group NV, David Nemeth
- It’s highly likely that the central bank will tighten at the next meeting, but the overall aim is to be able to react quickly to the changing market
Morgan Stanley, Georgi Deyanov, James Lord
- Recommend buying the forint against the dollar as part of a tactical bullish turn on emerging-market currencies
- The changes in monetary policy are bringing higher uncertainty about the interest rates outlook
Societe Generale, Marek Drimal
- Recommends long EUR/HUF trade targeting move to 400 from 357 within a month
- Outbreak-related restrictions and a drop in export markets will hurt the Hungarian economy, and a weaker currency may help a recovery
- “We think the market will likely, in the very near term, test the central bank’s resolve to defend the currency with potential additional tightening”
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