Hungary Central Bank Expands Funding Plan to Boost Growth

Hungary’s central bank raised the amount of interest-free funding to commercial banks by 50 percent to boost lending and invigorate economic growth after a recession last year.

The Magyar Nemzeti Bank will raise the total amount of preferential loans to 750 billion forint ($3.4 billion) after lenders bid for more than the 500 billion forint initially offered, President Gyorgy Matolcsy said at a news conference in Budapest today.

Central banks around the world are looking for ways beyond interest rates to stimulate growth as borrowing costs approach zero. Hungary’s policy makers yesterday cut their benchmark rate to a record-low 4.5 percent. Last month they proposed the Funding for Growth plan, modeled on the Bank of England’s Funding for Lending Scheme, which seeks to increase loans to small and mid-sized companies.

“Boosting the funding plan by 50 percent, in our assessment, may realistically lead to a turnaround in lending for micro, small, and medium-sized Hungarian companies,” Matolcsy said.

The forint weakened 0.6 percent against the euro to 288.50 by 1:52 p.m. in Budapest after strengthening to 285.58 yesterday, the strongest since December. The currency rose 3.8 percent in the past month, the best performance among 31 major currencies tracked by Bloomberg.

Credit, Conversion

The central bank will also offer 425 billion forint to commercial lenders at zero percent interest, with the aim of extending credit to small businesses at a cost of no more than 2.5 percent.

The MNB will also offer 325 billion forint to allow small businesses to convert foreign-currency loans into forint at market exchange rates. The cost of the forint loans will also be no more than 2.5 percent.

The central bank initially offered 250 billion forint under each part of the plan. Of Hungary’s 40 financial institutions, 36 are participating in the program, Matolcsy said.

OTP Bank Nyrt., Hungary’s largest lender, competes mostly with units of international banks including Erste Group Bank AG, Raiffeisen Bank International AG, UniCredit SpA, Bayerische Landesbank AG, KBC Groep NV, and Intesa Sanpaolo SpA. The central bank has said it will allocate the zero-rate funding to help smaller domestic banks gain market share.

The central bank forecasts that the funding plan may boost gross domestic product by between 0.2 percent to 0.5 percent by the end of 2014, MNB Vice President Adam Balog said. The central bank in March forecast a growth rate of 0.5 percent for this year and 1.7 percent for 2014.

Rate Cuts

The funding plan complements the past 10 months’ consecutive quarter-point cuts in the benchmark interest rate. Policy makers reduced the benchmark two-week deposit rate yesterday to a record-low 4.5 percent from 4.75 percent and said the outlook for inflation, at an almost 39-year low in April, and for the economy pointed to further easing.

“I think that those may be right who see further room on a rate-cut path that takes the Hungarian interest rate with predictable and small steps to that neutral level which is recognized by money markets,” Matolcsy said.

Before it's here, it's on the Bloomberg Terminal.