Hungary Central Bank Should Consider Bond Purchases, Varga Says

Hungary’s central bank should consider a more active role in the secondary bond market as the country is still undergoing a period of economic crisis, Economy Minister Mihaly Varga said.

“This tool is deployed by all central banks that want to help economic growth,” Varga said in an interview with the news website Portfolio today, adding that the final decision is the Magyar Nemzeti Bank’s. Hungary isn’t interested in a forint that is “too weak,” he said.

Central bank Governor Gyorgy Matolcsy, who took over the monetary authority’s leadership this month, vowed to support the Cabinet in fighting the country’s second recession in four years without jeopardizing price or financial stability. Purchasing state debt risks the forint weakening and the government missing its goal of propping up lending, according to Concorde Securities.

“The bond market is functioning smoothly, the central bank buying bonds could be interpreted as state financing, which would be the worst possible message to send and a hotbed for a drastic forint weakening,” Janos Samu, economist at Budapest-based brokerage Concorde said by phone.

The forint strengthened 0.1 percent to 306.44 per euro by 1:06 p.m. in Budapest. It’s dropped 4.2 percent against the euro in the past month, the most in the world, according to data compiled by Bloomberg.

Hungary has “limited” tools to influence the exchange rate and should abstain from “continuously floating” the option of market intervention,’’ Varga said.

‘Policy Drive’

The central bank potentially buying state debt poses a risk to the currency by boosting “forint liquidity, which might not be fully sterilized,” Koon Chow, an emerging-market strategist at Barclays Plc in London, said in an e-mail today. “Also, it means yields reflect a policy drive rather than perceptions of what is fair value on bonds and this risks triggering selling of bonds by non-resident investors.”

Foreign investors held 4.8 trillion forint ($20 billion) of domestic debt as of March 22, compared with a record 5.1 trillion forint at the end of last year, according to Debt Management Agency data.

The central bank buying government bonds and thus boosting commercial banks’ liquidity may lead to lenders depositing extra funds in two-week notes at the central bank or investing them in foreign assets, Zoltan Arokszallasi, an economist at Erste Group Bank AG in Budapest, said by phone today.

‘Could Backfire’

“If the aim were to cut financing costs this way, the measure could backfire as the market would interpret it as an unorthodox step,” Arokszallasi said.

Hungary will lower the benchmark interest rate to a record-low 5 percent tomorrow, according to 25 economists in Bloomberg survey. Three forecast a reduction to 4.75 percent and one predicts borrowing costs will remain unchanged.

Central bankers will meet as investors focus on the possibility of Matolcsy deploying unconventional measures to end the recession and help foreign-currency borrowers.

The government will only use “existing tools” for now to help foreign-currency mortgage holders as the government sees “no final solution” for helping all 1.7 million affected debtors, Varga said in the interview. Keeping the banking industry “operational” and boosting lending are important for the economy, he said.

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