Hungary Creates New Benchmark Rate to Fuel State-Debt Demand

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Hungary’s central bank will switch its main policy rate to encourage local banks to buy government debt and cut the nation’s reliance on foreign financing.

The National Bank of Hungary will use a three-month deposit instrument as its new benchmark from Sept. 23, instead of a two-week facility, and access to the latter will be limited, it said in a statement. The forint dropped to its weakest against the euro since February.

The measures mark the most ambitious regulatory change on Hungary’s financial market since the government forced banks to convert foreign-currency mortgages to forint earlier this year. Prime Minister Viktor Orban’s cabinet and his allies at the central bank have sought to cut the nation’s reliance on external financing, one of the reasons the country hasn’t regained its investment-grade debt rating.

“We’re continuing our program of self-financing, cutting our vulnerability by boosting banks’ purchases of government debt,” central bank Executive Director Marton Nagy said. “Buying government debt will be much more attractive for banks.”

The forint weakened 0.7 percent to 310.8 per euro by 4:46 p.m. in Budapest, the weakest intraday level since Feb. 3. The yield on the benchmark three-year government bond fell 18 basis points to 2.12 percent, the lowest since April 8 on a closing basis.

‘Gradual Adjustment’

“There will be a gradual adjustment from the market in rates and the volume of two-week deposits as the September shift nears,” David Nemeth, an economist at KBC Groep NV’s Hungarian unit, said in an interview.

The central bank will start setting the benchmark rate on the three-month facility at a Sept. 22 meeting of the Monetary Council, Executive Director Daniel Palotai said. He suggested there may not be a change in the level of the benchmark solely because of the longer maturity of the new instrument.

“There is no huge difference between the three-month instrument and the two-week facility from the perspective of monetary policy,” Palotai told reporters.

The central bank lowered the two-week deposit rate to a record 1.65 percent from 1.8 percent on May 26, the third 15 basis-point cut in as many months. Rate-setters then signaled that the inflation outlook allowed for further “cautious” easing.

Rate Outlook

“We see the depo facility changes as a de facto additional easing of monetary policy and forcing some convergence” of the three-month interbank rate to the new benchmark, Peter Attard Montalto, an economist at Nomura International in London, said by e-mail. The move “reinforces” Nomura’s estimate that the main rate will fall to 1.5 percent this month and 1.2 percent in the third quarter, “maybe before the September change,” he said.

Central bankers predict banks will buy as much as 750 billion forint ($2.7 billion) in government debt annually as they shift funds from two-week deposits, which will capped at 1 trillion forint by year-end. Banks currently hold 5 trillion forint in the two-week deposits, central bank data show.

The shift to government bonds will be spurred by the central bank’s decision to not accept the three-month facility as a “liquid” instrument, Nagy said, forcing banks to instead turn to government debt. Policy makers last year converted the two-week bill instrument to a deposit facility, which helped push Treasury bill yields to record lows.

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