Hungary Keeps Main Rate at Record Low Before Deposit Squeeze

  • Central bank cuts overnight lending rate, reserve ratio
  • Central bankers flag readiness to ease policy further

Hungary’s central bank left its benchmark interest rate at a record low for a fifth month and signaled its willingness to ease policy further as it rolled out more unconventional measures to loosen monetary conditions.

The National Bank of Hungary left the three-month deposit rate at 0.9 percent Tuesday, matching forecasts. The central bank at the same time cut its overnight lending rate to 1.05 percent from 1.15 percent and lowered the mandatory reserve ratio to 1 percent from 2 percent.

Hungarian rate setters are shifting their focus to unconventional policy, citing a preference to hold the benchmark rate for a sustained period to avoid having to reverse any potential cuts. On Wednesday, the monetary authority will start pushing out commercial-bank deposits parked in its facilities.

“The unconventional policy may lead to a reduced interbank interest rates and government-bond yields,” Gergely Urmossy, a Budapest-based economist for Erste Group Bank AG, said in an e-mail after the decision. “Eroding interest rates and yields, in turn, may cause the forint to weaken against the euro if interest-rate premiums narrow further.”

Liquidity Boost

In two foreign-currency swap tenders in the past two weeks, the central bank boosted lenders’ liquidity by 400 billion forint ($1.4 billion), helping push the Bubor interbank rate below the benchmark level. The cut in the reserve ratio will add another 170 billion forint of extra liquidity once it becomes effective Dec. 1, according to a website statement.

The forint reversed gains to trade 0.1 percent weaker at 308.84 to the euro at 3:24 p.m. in Budapest. The yield on the 10-year government forint bond fell to 2.88 percent from 3.01 percent two weeks ago. Investors are being drawn to Hungary’s current-account surplus, fiscal discipline and reduced vulnerability to exchange-rate swings, all of which were cited last month by S&P Global Ratings in its decision to return the sovereign to investment status.

The three-month Bubor fell to 0.81 percent on Tuesday from 0.88 percent in Sept. 20, when policy makers said they’d limit benchmark deposits at a cumulative 900 billion forint at monthly tenders in the fourth quarter. There was 1.3 trillion forint outstanding in three-month central bank deposits as of Oct. 19, according to central bank data.

Unconventional Arsenal

Since taking over the central bank in 2013, Governor Gyorgy Matolcsy has spearheaded unconventional policies for inflation and economic growth. They 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 rose 0.6 percent in September from a year ago, the fastest pace of increase since January. The central bank, which targets 3 percent price growth in the medium term, said on Oct. 11 that it still saw the inflation environment as “subdued.”

While the current benchmark rate is in line with the level needed to meet the central bank’s inflation goal over the medium term, the rate-setting Monetary Council said Tuesday that it stands ready to “ease monetary conditions further” if necessary. A central bank press official, who asked not to be identified citing internal protocol, said any further monetary easing would be focused on unconventional policy.

Ultimately policy makers may decide to restart cuts in the benchmark rate as well, as the inflation rate may stay below the central bank’s target through 2018 and economic growth may be slower than authorities forecast, according to William Jackson, a London-based economist at Capital Economics Ltd.

“We wouldn’t rule out a few small cuts in the three-month deposit rate over the next three to six months,” Jackson said.

— With assistance by Gabriella Lovas, Kristian Siedenburg, and Harumi Ichikura

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