Hungary to Take `Big Step' in Monetary Easing in 2016, Nagy Says

  • Central bank's measures to be focused on interest-rate swaps
  • Policy makers want to boost debt purchases by commercial banks

Hungary’s central bank will continue its unconventional monetary easing early next year as it seeks to reduce yields and boost purchases of government bonds by commercial lenders, National Bank of Hungary Vice President Marton Nagy said.

The central bank will take a “big step” in unconventional easing and the measures will make “more active use of interest-rate swaps” to influence the size and price of purchases of government debt by commercial banks, Nagy told reporters in Budapest on Friday. The central bank’s priority remains for banks to use funds for lending, he said.

Hungarian central bankers on Tuesday left their benchmark interest rate at a record low 1.35 percent for a fifth month and reiterated a pledge to focus on unconventional monetary easing. Policy makers are shifting gears as inflation is forecast to average zero this year while the economy slows after European Union funding, the biggest source of public investment, is set to drop off in 2016.

The central bank doesn’t want to influence the forint, though it takes the exchange-rate level into account in its monetary-policy decisions, according to Nagy.

Bonds, Forint

The yield on Hungary’s 10-year forint government bonds rose to 3.74 percent on Monday, the highest in more than three months. It fell to 3.52 percent on Friday. The forint strengthened 0.4 percent to 315.66 versus the euro at 9:57 a.m. in Budapest, paring its loss to 1.2 percent this month.

The central bank is more independent now in its monetary policy and doesn’t have to immediately follow major counterparts such as the U.S. Federal Reserve, Nagy said. The Fed this week lifted borrowing costs for the first time in almost a decade, exiting record lax monetary policy that encouraged investors to pour money into higher-yielding developing nations.

The central bank is less sensitive to a weaker forint after authorities agreed with commercial banks earlier this year to convert household mortgage loans -- until then mostly denominated in Swiss francs -- into forint and the government cut the foreign-currency share of its debt load by refraining from selling Eurobonds in 2015.

Boosting Lending

The Hungarian central bank is planning to lower supervisory capital requirements next year and will assume part of the risk on some loans via interest-rate swaps to encourage banks to step up lending. It’s already introduced a new benchmark instrument in September and lowered rates on overnight deposits to prompt lenders to buy government debt.

The government, meanwhile, is cutting the value-added tax rate for new home construction to 5 percent from 27 percent starting next year and until 2019. The measure will boost gross domestic product by at least 0.4 percentage point and will ensure that the economy will grow by 2.5 percent next year, Nagy said. The government sees economic growth of around 3 percent this year, down from 3.7 percent in 2014.

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