Hungary Funding Plan to Dwarf Rate Policy, Morgan Stanley

The Hungarian central bank’s expanded plan to boost economic growth with discounted funding to companies will overshadow the interest-rate path in monetary-policy importance next year, Morgan Stanley said.

Central bankers, who cut the benchmark rate for a 16th straight month yesterday to a record-low 3.2 percent, have added 2 trillion forint ($9.1 billion) to the initial 750 billion forint in free funding, which banks must relay to small and medium-sized companies at no more than 2.5 percent interest.

“It is clear to us that into 2014, the big story for monetary policy is not how much lower the base rate goes from here, but how effective” the funding plan “turns out to be,” Pasquale Diana, a London-based Morgan Stanley economist, said in an e-mailed note today.

The Magyar Nemzeti Bank’s Funding for Growth, which at 10 percent of gross domestic product is as much as twice the relative size of a similar U.K. plan, seeks to compensate for a plunge in lending. Soaring default rates on foreign-currency loans and government-imposed extraordinary levies on the financial industry accelerated withdrawals by mostly foreign-owned banks.

Hungary has room to cut the main rate further with inflation the slowest in more than 39 years and the economy still recovering from a recession last year, policy makers said yesterday in a statement. The benchmark is increasingly “just a signaling function” as “almost all new loans” are financed by the central bank’s Funding for Growth plan, Diana said.

Below Forecast

The central bank will probably reduce the two-week deposit rate to 2.6 percent early next year, lower than central bank President Gyorgy Matolcsy’s earlier forecast for a range of 3 percent to 3.5 percent, Diana said. Matolcsy’s range is probably a “moving one” that can dip lower if the bank cuts its inflation forecast next month, Diana said.

The forint traded little changed at 299.13 per euro at 11:58 a.m. in Budapest today. The currency depreciated 2.6 percent this year, the fourth-best performance among 24 emerging-market currencies tracked by Bloomberg.

The second phase of the plan, which started on Oct. 1, will limit the amount of funds companies can use to refinance existing debt in an effort to spur new lending and boost the economy. Ninety percent of the funding must now be used for new investments, which will lead to reduced demand early next year before gaining momentum from spring of next year, according to Matolcsy.

“We could have a material easing in credit conditions in 2014 regardless of what happens to the base rate,” Diana said, referring to the central bank funding plan.

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