Hungary's Who-Blinks-First Versus Markets Nears Decisive MomentBy
The National Bank of Hungary is locked in a staring match with the market, and the moment of reckoning may be near.
As interbank rates continue to climb in defiance of policy makers’ push to keep funding conditions loose, the monetary authority probably needs to double down on its unconventional easing methods. It will have to boost supply of currency swaps at a regular sale next week -- when 60 billion forint ($223 million) of existing contracts mature -- to pump more cash into markets if it wants to pin short-term rates near zero, according to OTP Bank Nyrt.
The main money-market rate has climbed to an eight-month high, moving further from a zero level that the central bank had pledged to defend until end-2019. Funding costs are rising amid doubts how long they can be held artificially low with a tightening bias across much of the region. A spillover from currency-swap rates, pushed higher by foreign demand, is also pressuring rates, said Judit Szombath, a money-market trader at Hungary’s largest bank.
“The central bank would at least need to roll over the maturing swaps, and an increased offer would be required to help lower rates,” Szombath said by phone on Thursday. “While we had hardly seen any bids for the swaps over the past months, there is now relatively large interest for all maturities, as the still-low implied yields are an attractive way to finance forint positions from abroad.”
The three-month Bubor, the most closely watched interbank rate in Budapest, rose two basis points on Thursday to 0.09 percent. Ten-year bond yields added 7 basis points, taking the increase in May to 54 basis points -- on track for the biggest monthly jump since 2012. Hungarian rates have climbed with a global emerging-market selloff having an outsized impact on the nation’s markets, where policy makers have kept financing conditions looser compared with most regional peers.
In response to the increase in borrowing costs, policy makers have boosted the volume of outstanding foreign-currency swaps to a record 1.81 trillion forint. While swap tenders are typically held on Mondays, the May 21 public holiday in Hungary will probably push next week’s sale to Tuesday, the same day as the central bank’s policy meeting.