Hungary to End 2-Week Facility in Unconventional Easing Push

  • Central bank to eliminate 2-week facility by end of April
  • Authority to boost swap auctions to help debt demand

Hungary’s central bank will gradually phase out its two-week deposit facility after 17 years to ease monetary conditions and help reduce the country’s external vulnerability by channeling lenders’ liquidity toward the debt market.

The National Bank of Hungary will gradually cut amounts allotted at two-week deposit auctions from April 1, with the target of reducing the current 1 trillion forint ($3.4 billion) kept in the facility to zero by May, the central bank said in a statement Tuesday. The monetary authority is looking to prompt local banks to increase their purchases of government securities by as much as 800 billion forint by the end of April, Deputy Governor Marton Nagy told reporters in Budapest.

"The phase-out of this facility counts as monetary easing because it will push yields lower over the entire curve," Nagy said. "This step completes the overhaul of the central bank’s monetary policy tools. However I don’t want to say this is the end, we may fine-tune our set of facilities in the near term if need be."

Hungarian central bankers have left their benchmark interest rate at a record-low 1.35 percent since July as they turned their focus to unconventional monetary easing. Policy makers are shifting gears after near-zero inflation last year. The economy is also slowing as European Union funding, the biggest source of public investment, is set to drop in 2016.

Stable Financing

Policy makers said in December they were "thoroughly examining" unconventional monetary easing measures. Rate setters plan to keep the benchmark steady until early 2018, Nagy said last month. The jump in debt demand will help reduce the ratio of foreign currency-denominated debt to 27 percent of the total by the end of 2016, he said on Tuesday, adding that such a level would be near a record low.

The forint strengthened 0.3 percent to 316.5 against the euro as of 5:15 p.m. in Budapest. The currency rose 0.4 percent last year after two years of declines.

The termination of the two-week facility "will contribute to a more stable financing of government debt and a reduction in the costs of debt financing," the central bank said in the statement.

The steps announced Tuesday may help offset fund outflows from Hungary, Dan Bucsa, an economist at UniCredit SpA in London, said in an e-mailed note.

"The new measures could help government bonds outperform regional peers as Hungary’s is the only yield curve to receive direct support from monetary policy," Bucsa said.

The central bank will increase the amount offered at interest-rate swap auctions by 20 percent to provide additional support to banks purchasing government debt, it said. It will also “ensure that the pricing of the instrument reflects the key strategic importance of diverting bank funds to the government securities market," according to the statement.

Banks entered into IRS transactions with the central bank in the amount of more than 1.3 trillion forint in the past 18 months, while boosting their holdings of government securities by over 2 trillion forint.

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