The HUF-liquidity swap stock can change in either direction in order to reach the target liquidity level, Mihaly Hoffmann and Peter Pal Kolozsi from the National Bank of Hungary (NBH) wrote in an article in the news portal Portfolio. The NBH uses the swap instrument to offset exogenous from a monetary policy perspective liquidity effects in order to achieve the desired level of excess liquidity, the authors said. Changes in the swap portfolio cannot be therefore viewed by themselves as an indication of the monetary policy stance, they pointed out. The NBH does not have a target level for the swap stock and it can change in either direction depending on liquidity developments, the article stressed.
The MPC decided to reduce the crowded-out liquidity by HUF100bn to HUF200-400bn for Q3, the authors reminded. The liquidity reduction is not solely consistent with the reduction of the swap stock due to other liquidity developments and a liquidity reduction can be achieved even with an increase in the swap stock, they pointed out. Such processes, which can cause diverging trends of the crowded-out liquidity and the swap stock, might materialize in H2, according to the article. They will be related to other factors tightening bank liquidity beyond the MPC’s target and will stem from fiscal discipline, the accumulation of retail securities in bank balance sheets and two-way risks regarding cash holdings, the authors explained.
We think that the article might aim to prepare the ground for an upcoming increase in the swap stock. The NBH probably wants to avoid market interpretations that it is excessively dovish, probably also implying that it is comfortable with the current forint exchange rate, in our view.