Matolcsy Opts Against Bazooka in Hungary Funding for Growth Plan
Hungary’s central bank soothed investor concern that it would embark on large-scale unconventional stimulus under new President Gyorgy Matolcsy, a critic of the previous monetary-policy leadership.
The forint and bonds rose yesterday after the Magyar Nemzeti Bank announced a 500 billion-forint ($2.1 billion) program, including interest-free funding for commercial lenders, to boost corporate borrowing and said it would use about 10 percent of its foreign-currency reserves to cut the country’s short-term external debt.
Matolcsy took office last month after levying the highest bank tax in Europe as economy minister, which contributed to Hungary’s second recession in four years. He had criticized the previous central bank leadership for not doing enough to boost growth. The plan is more limited than previous market speculation, according to BNP Paribas SA. (BNP)
“All those who expected” Matolcsy “to fire a big bazooka of unorthodox monetary-policy measures” yesterday “were certainly disappointed,” Michal Dybula an economist at BNP in Warsaw, said in an e-mailed report yesterday. The plan “poses little in the way of significant credit risk to the bank, nor does it threaten the forint exchange rate to any great extent.”
The forint reversed losses after details of the plan were announced and gained 0.6 percent to 300.85 per euro by 8:28 p.m. in Budapest. OTP Bank Nyrt. (OTP), Hungary’s largest lender, rose 2.3 percent to 4,272 forint. The yield on Hungary’s 10-year government bond fell 9 basis points to 6.02 percent.
Central banks around the world are looking for ways to stimulate growth. The European Central Bank stands ready to cut interest rates if the economy deteriorates and is considering additional measures as a debt crisis enters its fourth year, ECB President Mario Draghi said yesterday. The Bank of Japan doubled monthly bond purchases yesterday as part of a bid to end two decades of stagnation and 15 years of deflation.
The Hungarian central bank is seeking to emulate the Bank of England, which uses its Funding for Lending program to stimulate credit, Matolcsy said yesterday. The economy shrank 2.7 percent in the fourth quarter from a year ago, the biggest drop in three years.
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. On March 1, he said the central bank can support government policies and boost the economy as long as it doesn’t jeopardize price and financial stability.
Speculation about a stimulus plan included potential bond purchases by the central bank, according to Concorde Securities in Budapest. The forint also strengthened as policy makers decided against a push to convert foreign-currency housing loans into forint, Equilor Befektetesi Zrt. said in an e-mail.
“The size and the scope of the program ease concerns about excessive monetary easing that may undermine stability,” Eszter Gargyan, an economist at Citigroup Inc. in Budapest, said in an e-mail yesterday.
Under its preferential-lending plan, the central bank will offer 250 billion forint to commercial lenders at zero percent interest, with the aim of extending credit to small businesses with an interest rate of no more than 2 percent, Matolcsy said.
Another 250 billion forint will be available to small- and medium-sized companies to convert foreign-currency debt to forint at market exchange rates, he said.
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.
The central bank, which meets commercial lenders on April 8, 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 yesterday.
“The program provides for the long-awaited start of low- interest, forint-based lending,” the Economy Ministry in Budapest said in an e-mailed statement yesterday. The plan is “great help for Hungarian small and medium-sized enterprises, which can help start Hungary’s economic growth.”
Policy makers are also seeking to reduce Hungary’s short- term external debt by 1 trillion forint by using about 3 billion euros ($3.86 billion) from its foreign-currency reserves.
The Magyar Nemzeti Bank wants to convince commercial banks to repay their foreign-currency debt maturing in less than a year, extending swap lines to them for conversions to protect the forint from weakening. The measure 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.
The central bank will also offer the Debt Management Agency the possibility to convert forint into foreign currencies if it decides to issue longer forint debt to repay maturing foreign- currency loans.
“The plan is not as bold as it could have been,” Neil Shearing, a London-based economist at Capital Economics Ltd., said in an e-mailed report. “The provision of cheap forint liquidity is unlikely to provide a big boost to lending and the plan to switch the foreign-currency loans of SMEs into local currency will not ease their overall debt burden.”
Foreign-currency reserves and external debt expiring within one year would fall “by the same extent,” ensuring “reserve adequacy,” according to a statement published on the MNB’s website yesterday. Reserves were at 32.3 billion euros at the end of February, 4 percent higher than a year earlier.
“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.”