Hungarian central bank launches tool to drain liquidity after rate hikes end

The National Bank of Hungary (NBH), which ended its cycle of rate hikes last month by raising the base rate to 13%, said it would deploy a range of tools to tighten liquidity conditions from this month, including the new deposit instrument.

“With today’s tender, the BNH begins a marked tightening of liquidity and thus continues monetary tightening,” the bank said in a statement, adding that it would hold a similar tender. next Wednesday.

The bank said its tightening campaign could deplete liquidity faster than expected.

The forint, which has been Central Europe’s worst-performing currency this year, slipping more than 12% against the euro, firmed to 421 from around 423 after the tender. moving away from record lows of 426 reached on Monday. It has come under pressure from a rising dollar and vulnerabilities in the Hungarian economy, such as the widening current account deficit.

The central bank also raised the reserve requirement rate for commercial banks and will hold another discount bond auction on Thursday to drain liquidity.

Some analysts said the sudden halt in rate hikes last month was premature, with inflation in double digits and rising, and given Hungary’s widening current account deficit due to soaring energy import costs.

Bank of America analysts said this made the forint more vulnerable in the current fragile global environment.

“But in the coming weeks, the central bank is committed to compressing liquidity to drive up short-term rates. This, combined with government efforts to secure an agreement with the EU (on funding) before the end of the year, could bring some long-term closer to HUF,” they added in a note on Monday.

“For a sustained recovery, we need to see an improvement in the balance of payments. If liquidity measures fail to support the HUF, rate hikes will be back.”

On Monday, Hungary also announced that it had reached an agreement to defer payments to Russia’s Gazprom for winter gas supplies, a move which analysts said could ease its external financing needs to short term.

($1 = 427.05 forints)

(Reporting by Krisztina Than and Gergely Szakacs; Editing by Mark Potter)

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