Hungary Cuts Overnight Rate to Near Zero in Public Debt Push

  • Central bank lowers overnight deposit rate to 0.1 percent
  • Policy makers aim to channel funds toward government bills

Hungary’s central bank lowered the interest rate on overnight deposits to almost zero in a bid to boost demand for government debt. The forint plunged.

Policy makers cut the interest rate offered on overnight deposits by 25 basis points to 0.1 percent, the central bank said in a statement on Thursday, two days after the Monetary Council set the new benchmark three-month rate at 1.35 percent. The panel is also reducing the interest it demands for overnight loans, the upper end of its interest rate corridor, to 2.1 percent from 2.35 percent, it said.

The monetary authority cut overnight rates after the government’s three-month Treasury bill yields came within three basis points of overnight deposit rates. The central bank may make further adjustments to its rate corridor should yields approach the deposit rate again, making the overnight facility too attractive compared with government notes, according to Vice President Marton Nagy.

"This isn’t monetary easing, that’s not our intention," Nagy told reporters in Budapest. "We see risks that funds will flow into the overnight deposits and that’s a risk we want to mitigate."

The forint dropped 1 percent to 315.42 per euro by 5:19 p.m. in Budapest. The yield on the benchmark three-year government bond dropped 14 basis points to 1.57 percent, a record low.

The central bank announced changes to its range of policy tools in June, extending the maturity of its benchmark instrument to three months from two weeks. Using the central bank’s three-month deposit as the new base rate encourages lenders to buy government bills instead, which are more liquid.

The shift has helped lower government borrowing costs. The Debt Management Agency sold three-month bills at an average 0.38 percent yield on Tuesday, matching the record-low at the previous sale one week earlier. The agency raised 12-month debt at an average yield of 0.47 percent on Thursday.

"This seems to be monetary easing that will primarily affect money markets," said Janos Samu, an analyst at Concorde Securities brokerage in Budapest. "Short yields will increase again as soon as extra demand disappears from the market."

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