January 30, 2020 / 11:48 AM / a month ago

UPDATE 1-Hungary's central bank warns market liquidity could drop in short term

(Adds analysts, forint reaction)

By Krisztina Than

BUDAPEST, Jan 30 (Reuters) - Hungary’s central bank warned of an impending drop in interbank market liquidity on Thursday as it tries to fine-tune liquidity conditions via its swap tenders, with the forint trading near all-time lows.

The forint fell to a record low versus the euro on Monday after the bank’s last such swap tender. Some market players said investors had expected more tightening in liquidity by the central bank than it had delivered.

The swap tenders, which allow the National Bank of Hungary to manage forint liquidity in the banking system, have been an important policy tool for the bank, which has held on to its dovish stance.

The NBH said in a study on its website on Thursday that the current abundance of liquidity in markets was misleading, and “might melt away rapidly.”

“All this means that the banking sector’s current abundant liquidity might decline substantially even if the NBH’s swap stock does not decrease. That should be taken into account in forecasting expected liquidity conditions,” NBH directors Barnabas Virag and Pal Kolozsi said.

Last June, the bank was forced to hold an extraordinary one-week swap tender to cope with a sudden liquidity shortage in the banking system, which pushed up interbank rates well beyond levels desired by the bank.

Peter Virovacz, an analyst at ING said the comments from the bank were a “gentle reminder that the FX swaps are not for an FX management purpose but a liquidity management tool.”

The forint eased to 338.16 from 337.50 after the bank published the comments on Thursday and analysts said there was room for more weakening.

“Their message is that the current monetary policy stays,” said Zoltan Varga, an analyst at brokerage Equilor. Varga said the forint could soon test the level of 340 if important resistance at 338.20 is broken.

“The NBH seems to be reluctant to tighten liquidity conditions faster reacting to FX volatility ahead of government operations draining liquidity, which may maintain pressure on the HUF in the short term amidst rising global risk aversion,” Citigroup analyst Eszter Gargyan said in a note on Thursday. (Reporting by Krisztina Than and Gergely Szakacs, editing by Larry King)

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