Hungary’s central bank will start a 500 billion-forint ($2.1 billion) program to boost lending to help end a recession and is seeking to reduce the country’s short-term external debt by using foreign-currency reserves.
The central bank may cut the reserves by 3 billion euros ($3.8 billion), a reduction that’s within its risk threshold, Magyar Nemzeti Bank President Gyorgy Matolcsy told reporters in Budapest today. A three-month “Funding for Growth Scheme” will include interest-free money for lenders and the refinancing of corporate foreign-currency loans, he said. The forint rose.
“The amount of foreign-currency reserves the bank flagged it wants to use isn’t drastic,” Viktor Szabo, a money manager who helps oversee $11.8 billion of assets at Aberdeen Investment Management Ltd. in London, said by e-mail. “However, I believe this is only the first step and it breaks a taboo, namely that they won’t touch the reserves.”
Matolcsy took office last month after levying the highest bank tax in Europe and nationalizing private pension fund assets as economy minister from 2010. The measures helped keep the budget deficit within the European Union’s 3 percent of economic output at the cost of damaging lending and investment.
The economy shrank 2.7 percent in the fourth quarter from a year earlier, the biggest decline in three years. The central bank is seeking to emulate the Bank of England, which uses its Funding for Lending program to stimulate credit, Matolcsy said.
“After reaching the goals of price and financial stability, the central bank can and must support the government’s economic policy,” Matolcsy told reporters. “We have now reached that point.”
The forint reversed losses after details of the plan were announced and gained 0.4 percent to 301.46 per euro by 2:47 p.m. in Budapest. The yield on Hungary’s 10-year government bond fell 8 basis points to 6.037 percent.
The central bank is seeking to reduce Hungary’s short-term external debt by 1 trillion forint, which will “allow for bringing the foreign-currency reserves to a lower level,” according to a statement published on the bank’s website today. “Reserve adequacy is ensured by the fact that the use of foreign currency reserves reduces external debt expiring within one year by the same extent.”
The reserves were at 32.3 billion euros at the end of February, 4 percent higher than a year earlier.
The central bank will continue to pursue a “prudent and predictable” interest-rate policy in the aftermath of the measures, which won’t threaten financial stability and will have a “negligible” impact on mid-term inflation, it said in the statement.
Under the preferential-lending plan, the central bank will offer 250 billion forint in funds to commercial lenders at zero percent interest, which they can use to extend credit to small businesses with an interest rate of no more than 2 percent, Matolcsy said. Loans will be targeted at industries that have a key role in boosting potential growth, according to the statement.
Another 250 billion forint will be available to small- and medium-sized enterprises to convert foreign-currency debt to forint at market exchange rates, he said. Under the program, commercial lenders will receive interest-free funds from the central bank which they can offer to businesses for refinancing at a maximum interest of 2 percent.
The measures may help cut the amount commercial lenders keep in two-week central bank bonds by 900 billion forint to 3.6 trillion forint, Matolcsy said.
“All in all, the effect on the forint was positive, thanks in parts to previous market speculation about much more aggressive steps, which led to a type of relief,” Gergely Gabler, an analyst at Equilor Befektetesi Zrt. in Budapest, said in an interview at the central bank. “On top of that, if the targets are met, the country’s vulnerability can decrease somewhat.”