July 16, 2018 / 1:20 PM / 4 months ago

UPDATE 1-Hungary's central bank shortens FX swaps; preparing for tougher times?

(Adds details, analyst comment, forint)

By Krisztina Than

BUDAPEST, July 16 (Reuters) - Hungary’s central bank provided 77 million euros worth of one-month foreign-exchange swaps to banks at a tender on Monday and did not offer longer maturities, a possible signal the bank is gradually getting ready to withdraw liquidity from markets.

The FX swaps, which allow the central bank to manage forint liquidity in the banking system, have been an important tool since September 2016. The bank had offered FX swaps on one-1, three-, six- and 12-month maturities in the past to commercial banks.

The central bank has said in a reply to Reuters questions that it “was continuously monitoring liquidity trends” and held its swap tenders in line with the liquidity guidance of the Monetary Council.

At its last rate meeting, on June 19, the National Bank of Hungary left interest rates unchanged at record lows, but it said loose monetary conditions could no longer prevail until the end of its policy horizon, for the first time flagging an end to an era of cheap money.

Since the beginning of June, the NBH has left the total amount of excess liquidity in the banking system unchanged at 1.989 trillion forints ($7.23 billion), after increasing liquidity in the previous months.

Since the June rate meeting, the bank has not offered any 12-month swaps, and at its tenders in July only offered the one-month maturity.

Citibank analyst Eszter Gargyan said in a recent note that this suggested that “liquidity injections may be gradually scaled down by June 2019.”

“We expect that unless core inflation prints beat the latest NBH projections, the NBH is likely to limit the cautious shift in monetary policy to communication and shortening in FX swap tenors preparing for a gradual withdrawal of HUF liquidity stimulus by mid-2019,” Gargyan said.

The central bank, which has been leading markets with rate cuts and unconventional policies in recent years, has faced its first significant challenge from financial markets as the forint fell to record lows of 330 to the euro early this month.

The currency has regained some ground, strengthening to 322 by Monday. But some analysts say it was still exposed to dollar-driven swings in global market sentiment. ($1 = 275.0100 forints)

Reporting by Krisztina Than, editing by Larry King

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