Hungary's Nagy Rules Out Benchmark Cut Amid Unconventional Push

  • Central bank may adjust overnight rates, deputy governor says
  • Regulator monitoring 2-week deposit phase out, balance sheet

Hungary’s central bank will stick to its pledge to keep the benchmark interest rate unchanged and may instead fine-tune rates on overnight loans and deposits as the next step in its unconventional easing, National Bank of Hungary Deputy Governor Marton Nagy said.

The central bank on Tuesday left its benchmark three-month deposit rate unchanged at a record-low 1.35 percent for a sixth month. Policy makers said they were ready to consider further non-traditional easing steps to boost inflation and economic growth.

While strategists at several banks including Nomura and Raiffeisen had anticipated the possibility of further benchmark rate cuts, Nagy said the bank will instead focus on its interest-rate corridor, the rates on overnight loans and deposits. A three-year interest rate swap tender, another part of the bank’s arsenal to cut government borrowing costs and create incentives for commercial lending, also showed this week that it’s producing the intended results, Nagy said.

“We may fine-tune the interest-rate corridor,” Nagy told reporters in his office in Budapest on Friday. “This would be in line with a strategy of not touching the benchmark interest rate and adjusting the rest.”

The central bank may make a decision on the corridor in March or April, after evaluating liquidity flows during the phasing out of its two-week deposit facility, its former benchmark instrument. The monetary authority’s balance sheet is expected to shrink by a third in March to about 3 trillion forint ($10.4 billion) with the expiration of swaps commercial banks took for the conversion of foreign-currency mortgages last year. The central bank will monitor the combined effect of the shrinking balance sheet and the two-week phase out from April 1, Nagy said.

Cutting Yields

Policy makers cut the interest rate offered on overnight deposits and demanded on loans in September by 25 basis points to 0.1 percent and 2.1 percent, respectively, as they sought to make parking banks’ excess liquidity at the central bank less favorable compared with buying government bills.

The yield on Hungary’s benchmark three-year government bonds fell seven basis points to 1.96 percent by 10:49 a.m. in Budapest, extending a 21 basis-point decline on Thursday. The forint strengthened 0.4 percent to 312.45 per euro, paring this week’s decline to 0.3 percent.

Thursday’s tender for three-year interest-rate swaps known as LIRS increased demand for three-year government bonds and cut yields, Nagy said. Commercial banks are required to boost credit to small- and medium-sized companies by a quarter of the swaps received.

The central bank doesn’t see demand to expand the 1 trillion forint limit for LIRS, Nagy said. It allotted 618 billion forint of the swaps Thursday, compared with a 200 billion forint initial offer. Lenders are on track to expand credit to small- and medium-sized companies by as much as 10 percent this year compared with 2015, Nagy said.