Hungary to Squeeze Cash Deposits to Ease Policy With Rates Held

  • Central bank puts 900 billion-forint cap on deposit facility
  • Rate setters kept benchmark rate unchanged for fourth month

Hungary’s central bank is cutting the amount of cash banks can keep in its main deposit instrument as it seeks to ease policy without adjusting the benchmark interest rate.

Domestic lenders will be able to place no more than a total of 900 billion forint ($3.6 billion) in three-month deposits at the three last monthly tenders of the year, the National Bank of Hungary said in a statement Tuesday. That compares with the current 1.6 trillion forint held in the facility and with the a year-end estimate of 1 trillion forint in a Bloomberg survey of seven economists. Policy makers left the three-month deposit rate at 0.9 percent, matching the forecasts of all 21 economists in a Bloomberg survey.

"The three-month deposit will be an integral part of monetary policy and the amount can be shifted significantly lower if that were to become needed," Deputy Governor Marton Nagy told reporters in Budapest. Whether banks place excess liquidity into the central bank’s overnight deposits, lend it on the interbank market or buy government debt or boost lending, “the cap will put downward pressure on interest rates on all markets,” Nagy said.

The central bank unfurled yet another unconventional policy measure to ease monetary conditions without having to touch the benchmark rate, which it wants to leave unchanged for a sustained period. The cap on commercial banks’ access to the three-month deposit facility is intended to convince lenders to shift funds parked at the central bank to the interbank or debt markets, which would reduce borrowing costs, or to invest them abroad and weaken the forint.

Policy makers on Tuesday said the cap will result in pushing at least 200 billion forint out of the deposit instrument when accounting for maturities.

“If surplus liquidity is concentrated in a small number of banks, then the impact of the cap may be limited," said Magdalena Polan, an emerging-markets economist at Legal & General Group Plc in London. Whether the central bank will need to impose a stricter cap to achieve its target on lowering interbank rates also depends on how many new bonds the lenders buy and how expiring currency swaps drag on liquidity, she said.

The forint surged to the strongest against the euro in more than six months after S&P Global Ratings on Friday surprised investors by returning Hungary’s government debt to investment category after almost five years in junk grade. It has risen 1.9 percent against the euro this year, the best performance among the European Union’s eastern members. The currency traded 0.3 percent weaker at 309.55 against the euro at 4:15 p.m. in Budapest.

Central bankers are contending with an appreciating currency as investors are drawn to Hungary’s current-account surplus, fiscal discipline and reduced vulnerability to exchange-rate swings, all of which were cited by S&P in its decision to upgrade the sovereign. The yield on the 10-year government bond fell four basis points to 2.8 percent on Tuesday, near a record-low 2.76 reached on January of 2015.

Since taking over the central bank in 2013, Governor Gyorgy Matolcsy has spearheaded unconventional policies for inflation and economic growth. The measures included providing zero-interest funding to commercial banks to boost lending, replacing the former two-week benchmark facility with the three-month deposit while keeping its level unchanged and pushing funds parked at the central bank into the debt market.

Consumer prices fell for a fourth month in August, dropping 0.1 percent from a year earlier. The central bank, which targets 3 percent inflation in the medium term, lowered its price-growth projection for both this year and the next and now sees inflation at 0.4 percent and 2.6 percent respectively. It left its economic-expansion forecasts unchanged at 2.8 percent for 2016 and 3 percent in 2017.

“Tweaks to the bank’s sterilization facilities tend not to have a significant impact on monetary conditions in Hungary,” said William Jackson, a senior emerging-market economist at Capital Economics in London. “Past form suggests that banks are likely to opt to invest in government debt” and that has proven to have a limited effect on interbank rates, he said.

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