The Magyar Nemzeti Bank’s primary objective is to achieve and maintain price stability. Without prejudice to its primary objective, the Magyar Nemzeti Bank preserves financial stability and supports the Government’s economic policy. The Council remains committed to maintaining price stability during the coronavirus pandemic. If warranted by a persistent change in the outlook for inflation, the Council will be ready to use the appropriate instruments.
Over the coming quarters, developments in underlying inflation are expected to be driven by the overall balance of the upside effects of supply-demand frictions related to the coronavirus pandemic and the growing disinflationary impact of weak demand. As referred to in the risk scenario highlighted in the September Inflation Report, currently an increase in global risk aversion poses the greatest risk to the outlook for inflation. It is the MNB’s clear intention to prevent the current uncertain global market environment from causing an increase in upside risks to inflation through any channel. Accordingly, the MNB has in recent weeks responded to rising risks by a series of coordinated actions.
Using the swap facility providing foreign currency liquidity, introduced on 8 September, there was no tension in the swap market at the end of September, owing to the Bank’s active presence. At its September policy meeting, the Monetary Council left the policy rate unchanged and signalled that it would be ready to use the appropriate instruments if warranted by a persistent change in the outlook for inflation. Consistent with this, on 24 September 2020 the Magyar Nemzeti Bank changed the one-week deposit rate from 0.6 percent to 0.75 percent.
The Bank’s measures support the achievement of monetary policy objectives in a coherent way. It is a key priority for the Monetary Council that short-term rates in every sub-market and at all times should develop consistently with the level of short-term rates deemed optimal by the Monetary Council. Actions taken at the short end of the yield curve contribute to preserving the stability of monetary conditions and through this to maintaining price stability.
From the Bank’s perspective, the importance of long-term yields has grown in recent years. In long-term asset markets, the MNB ensures the proper functioning of the monetary transmission and the development of appropriate interest rate conditions by providing ample liquidity and by using targeted instruments. Through direct government securities purchases and its collateralised lending facility, the Bank has already provided around HUF 2,300 billion (nearly 5 percent of GDP) of funding, mainly to support the middle and the long end of the yield curve in the government securities market. The latter instrument has greatly contributed to increasing the banking sector’s market holdings of forint government securities by nearly HUF 1,800 billion (3.8 percent of GDP). The MNB’s monetary policy approach has had a flattening effect on the yield curve.
On 6 October, the Monetary Council decided to change certain parameters of the programme of government securities purchases to promote the effectiveness the Bank’s programmes affecting long-term yields. Under the measures, the amount available for purchase of certain series of government securities has been raised from 33 percent to 50 percent. Furthermore, the range of assets available for purchase has been extended to government-guaranteed debt securities issued, using the same strategic parameters as those of government securities purchases. In addition to the introduction of the new fine-tuning measures, the Bank has decided to take a flexible approach to the amount of its weekly purchases, focusing its purchases on longer maturities. Purchases may take place at regular weekly tenders as well as out of tender. The Monetary Council will use the government securities purchase programme through a lasting market presence to the extent required. In accordance with its previous decision, the MNB will carry out a technical review if the purchased amount increases by HUF 1,000 billion from the initial amount set at the start of the programme.
The decision is aimed at preserving the effectiveness of monetary policy transmission, which contributes to lengthening the maturity profile of government debt, to maintaining the stability of the government securities market and to reducing the steepness of the yield curve even in a rapidly changing global market environment and with the increase in government financing requirement. Consistent with the ECB’s measures to mitigate the economic effects of the coronavirus pandemic, raising the amount available for purchase of certain series of government securities provides greater room for the MNB to flexibly influence monetary conditions at the longer end of the yield curve, if warranted by a change in the economic and financial market environment. The measure is consistent with the role played by, and the importance attached to, long-term yields in monetary transmission and financial stability in recent years.