Hungary to Tap Central Bank Currency Reserves in Growth PlanZoltan Simon and Andras Gergely
Hungary’s central bank will start a 500 billion-forint ($2.1 billion) program to boost lending to help end a recession and plans to use foreign-currency reserves to cut the country’s short-term external debt. The forint rose.
The central bank may cut reserves by about 10 percent, within its risk threshold, Magyar Nemzeti Bank President Gyorgy Matolcsy told reporters in Budapest today. A three-month plan will include 250 billion forint of interest-free money for lenders to boost corporate lending and an equal amount for companies to refinance foreign-currency loans in forint.
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 doing too little to boost growth. The plan is more limited than previous market speculation, according to Concorde Securities in Budapest.
“The program is indeed limited in its scope and in its impact on the foreign-currency reserves,” Janos Samu, a Budapest-based economist at Concorde, said by e-mail. “The most important” effect may be that “uncertainty surrounding the new measures can now drop.”
The forint reversed losses after details of the plan were announced and gained 0.8 percent to 300.22 per euro by 5:28 p.m. in Budapest. OTP Bank Nyrt., 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 today. The Bank of Japan doubled monthly bond purchases today as part of a bid to end two decades of stagnation and 15 years of deflation.
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. 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-mailed note.
“The market’s recent fear that the new NBH management may create huge monetary easing disappeared as the new program was revealed and this could give some boost to the forint in the short run,” Levente Papa, a currency strategist at OTP, said in an e-mail.
The central bank is seeking to emulate the Bank of England, which uses its Funding for Lending program to stimulate credit, Matolcsy said today. The economy shrank 2.7 percent in the fourth quarter from a year ago, the biggest drop in three years.
“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.”
Under Hungary’s 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. 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.
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 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.”
The central bank is 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 would 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.
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 today. 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.”
The central bank will start talks with commercial lenders on April 8, including on the repayment of their short-term obligations as well on the terms of preferential loans to small businesses, chief economist Daniel Palotai told reporters.
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 today.
“It is very welcome that Hungarian authorities are inclined to coordinate and cooperate with the market players,” Zoltan Torok, an economist at Raiffeisen Bank International AG in Budapest, said in an e-mail. “The new monetary policy measures should not jeopardize forint assets.”