Budapest, 20 September 2016 – In accordance with the decision of the Monetary Council, the Magyar Nemzeti Bank (MNB) has reduced the maximum volume offered at the three-month deposit instrument tenders of October, November and December 2016 to HUF 900 billion forints in total. As a result, at least HUF 200–400 billion will be crowded out from the deposit instrument. While the MNB will strive to allocate the volumes offered at each tender evenly, it reserves the right to deviate from this in function of liquidity developments. The allocation will take place in two rounds: the amounts allocated to individual banks will be determined on the basis of balance sheet total in the first round, and according to the principle of card allocation in the second round. The MNB is designing fine-tuning instruments to offset potential considerable and persistent liquidity shocks. The purpose of today’s decision is to stimulate the interbank market further and to facilitate the targeted easing of monetary conditions by way of unconventional instruments.
At its meeting today, the Monetary Council capped the amount of bank liquidity that can be placed in three-month deposits in 2016 Q4: the volume placed in bank deposits at the tenders held in October, November and December may not exceed HUF 900 billion in total. At present, banks hold HUF 1,629 billion in the three-month deposit instrument. As a result of the HUF 900 billion limit, at least HUF 200–400 billion will be crowded out from the instrument in view of the expected contraction in the banking sector’s liquidity in the remainder of the year due to autonomous factors and the central bank’s programmes. The liquidity thus released will generate a decline in yields in the interbank market and in the government securities market, through which the limit imposed on the three-month deposit instrument will support, as an unconventional measure, the MNB’s economic and lending incentive and self-financing programmes.
Within the bounds of the HUF 900 billion limit, with a view to supporting banks’ preparedness and transparency the MNB will strive to distribute the volumes offered at each tender evenly; however, for the sake of ensuring adequate flexibility, it reserves the right to deviate from this in light of ongoing liquidity developments. Allocation among individual banks will be a two-round mechanism at each tender: the amounts allocated by the MNB in the first round will be determined on the basis of balance sheet total, while the remainder of the limit amount will be allocated according to the principle of card allocation in the second round. Individual bank limits calculated on the basis of balance sheet totals will be reviewed on a quarterly basis.
In order to address the uncertainties surrounding liquidity developments, the MNB is designing fine-tuning instruments to provide and absorb liquidity as needed. These instruments are intended to manage considerable and persistent liquidity shocks. The MNB will decide on the operative details of the fine-tuning instruments in the course of October 2016.
The MNB will continuously monitor banks’ adjustment to the quantitative limit of the three-month deposit, with special regard to banks’ recourse to the central bank’s deposit and lending facilities, changes in interbank yields (BUBOR) and developments in the government securities market. The MNB will decide on the quantitative limit applicable in 2017 Q1 in December 2016.
The MNB decided to gradually limit access to the instrument at its meeting on 12 July 2016. As a first step, from August 2016 the MNB accepts deposits under its three-month deposit instrument once a month instead of the previous weekly frequency. Banks have responded to the reduced frequency of the tenders in line with the central bank’s expectations: yields have declined significantly both in the interbank market and in the government securities market. The limit imposed on the amount of bank liquidity accepted under the three-month deposit instrument is considered to be the second step of the process that started with reducing the frequency of the tenders. This step, however, is capable of generating a more substantial and persistent decline in the yields concerned, and it may also facilitate a further upswing in interbank market turnover. Improving the BUBOR market, which commenced at the MNB’s initiative in the spring of 2016, was an inevitable prerequisite of the decline in interbank yields. Due to the introduction of the mandatory price quotation system, banks’ limits against each other have significantly increased, market turnover has notably risen, and the information content of BUBOR has improved.