Hungarian central bank President Gyorgy Matolcsy will present a plan to boost lending as he seeks to prove monetary policy can help end the country’s second recession in four years.
Matolcsy will hold his first press conference as head of Magyar Nemzeti Bank at 11 a.m. in Budapest today, followed by presentations by central bank staff on “options to boost lending,” according to invitations sent by e-mail yesterday.
The new monetary policy chief took office last month after levying the highest bank tax in Europe as economy minister from 2010. The levy helped keep the budget deficit within the European Union’s 3 percent of economic output at the cost of damaging lending and investment. Now Matolcsy may seek to emulate the Bank of England in providing cheaper financing for lenders in return for credit expansion to boost growth, according to Capital Economics Ltd. and Concorde Securities.
“To the extent any new policies are announced, they are likely to be along the lines of a new funding for lending scheme,” Neil Shearing, an economist at Capital Economics in London, said in an e-mail yesterday. “Additional provision of local-currency finance by the” central bank “is unlikely to provide a significant boost to lending given that there is already a surplus of forint liquidity in the banking sector.”
The forint weakened 0.2 percent to 303.3 per euro by 9:30 a.m. in Budapest. It erased gains of as much as 0.6 percent yesterday after the announcement of today’s central bank meeting. The forint has dropped 1.5 percent in the past month.
The central bank may use tools the European Central Bank has used for stimulus and won’t introduce “unconventional” tools to boost the economy as Matolcsy wants to avoid a market “panic,” the newspaper Magyar Nemzet reported today, without citing anyone.
It may seek to provide cheap funding to commercial banks, with interest rates of 2 percent, or limit the funds banks can hold in two-week deposits at the MNB to boost lending to companies, the Origo news website said, without citing anyone. The central bank, and ultimately the budget -- which has to reimburse the MNB’s losses with a year’s delay -- would absorb losses from non-performing loans, Origo reported.
Launching a “quantitative easing” plan would be “strange” as unlike in other developed countries where the benchmark rate is close to zero, there is still room to cut the benchmark interest rate in Hungary, Daniel Bebesy, who helps manage $1.5 billion at Budapest Fund Management, said by phone. While the main rate is at a record-low 5 percent, it’s still the second-highest in the European Union.
“A funding for lending scheme in Hungary wouldn’t necessarily shock markets, the problem with it is more that it doesn’t work because the problem is not a lack of funds but a lack of demand,” Bebesy said.
Limiting two-week bank deposits at the central bank, which pay the benchmark rate as interest, would be “definitely negative” as it would be tantamount to a rate cut and may trigger a drop in the forint, Bebesy said.
Before his nomination to the central bank by Prime Minister Viktor Orban, Matolcsy called for the “brave” use of “unorthodox” monetary-policy tools in December, sending the forint to its weakest in seven months.
He said March 1 that the central bank can support the government’s policies and boost the economy as long as it doesn’t jeopardize price and financial stability.
The central bank can aid the economy by “helping to boost lending or buying bonds in the secondary fixed-income market,” said Mihaly Varga, Matolcsy’s successor at the Economy Ministry, according to the transcript of an interview published in The Wall Street Journal on April 2.
Monetary stimulus to boost growth may damage the economy and reduce the central bank’s credibility in a country lacking in “regulatory certainty and predictability,” Matolcsy’s predecessor at the central bank, Andras Simor, said on Jan. 17. Simor said it would cause “more harm than benefit” to embark on “general quantitative easing,” as that was done by countries where the benchmark rate is close to zero.
In Matolcsy’s first rate decision, policy makers on March 26 cut the two-week deposit rate to 5 percent, taking the benchmark to a record low with the eighth quarter-point reduction in as many months. Easing can only continue if uncertainty in the market environment abates, the central bank said in a statement, tightening its earlier conditions.
Hungary should pause with monetary easing after a series of “appropriate” cuts, the International Monetary Fund said on March 29. A further “deep” reduction of borrowing costs raises the risk of weakening the forint and undermining financial stability, the Washington-based lender said.
“I would be be critical of policy makers in Hungary, in terms of the unorthodox nature in which they set policy,” Sam Finkelstein, who helps manage $40 billion in emerging-market debt at Goldman Sachs Asset Management, said by phone from London. “I don’t see a material improvement in policy despite a modest cut from the new governor.”