Hungary Central Bank to Cap Benchmark Deposits to Avert Rate Cut

  • Change to benchmark facility will be second in 12 months
  • Policy seen as bid to keep rates steady as long as possible

Hungary’s central bank will cap deposits in its benchmark facility as policy makers seek to ease monetary conditions and stimulate economic growth without cutting the main rate.

Starting in August, the National Bank of Hungary will accept deposits in its three-month facility once a month, compared with once a week now, Vice President Marton Nagy told reporters in Budapest on Tuesday. The authority will then cap deposits from October 26, he said, adding that the details on limits will be published in September and updated once a quarter.

The move is the latest unconventional step by Hungarian policy makers, who switched the benchmark instrument from a two-week facility last year to avert the need for more interest-rate cuts after expressing concern about having to eventually tighten in the future. While rate cuts were ultimately restarted in March to prevent the appreciation of the forint, the monetary authority said last month it was done cutting and would keep the main rate at a record-low 0.9 percent.

Easing Conditions

The changes to the benchmark facility will “definitely reduce borrowing costs on the inter-bank market and cut yields on government bonds,” Nagy said. The measures will boost lending and channel commercial bank deposits from the central bank to the debt market, he said.

The forint was unchanged at 313.62 per euro at 3:21 p.m. in Budapest, erasing a drop after investors speculated that policy makers may adopt a longer maturity for the main policy tool. Nagy said rate setters considered extending the tenor of the benchmark and decided against it. The currency has gained 0.6 percent this year.

Critics of the central bank have said the institution’s aim to turn a profit and support Prime Minister Viktor Orban’s government may push the regulator toward avoiding rate increases as long as possible. Orban, a close ally of central bank Governor Gyorgy Matolcsy, faces elections in 2018.

Under Scrutiny

The central bank has come under scrutiny for spending its profit, including on luxury properties, and also for channeling money to members of Matolcsy’s family.

Nagy reiterated on Tuesday that policy makers want to keep the main rate stable and avoid an eventual increase to make the economic environment more predictable. He said that the policy tweak was “much better targeted” than a reduction of the main rate because it would help boost lending and lower bond yields.

“The central bank’s leadership is trying to avoid having to communicate an interest-rate increase during their tenure,” Daniel Bebesy, a portfolio manager at Budapest Alapkezelo Zrt., said in an e-mail.

The central bank has said it will support the government’s plan to boost growth, following an economic contraction in the first quarter. Consumer prices dropped 0.2 percent in June. Policy makers target 3 percent inflation.

    Before it's here, it's on the Bloomberg Terminal.