Photographer: Akos Stiller/Bloomberg

Hungary’s Central Bank Joins the Big Leagues With QE

Updated on
  • Governor Matolcsy wins over skeptics with market engineering
  • Hungary’s monetary easing bucks policy tightening in Europe

Hungarian central bankers are joining the quantitative easing era just as major global counterparts such as the U.S. Federal Reserve look to leave it.

The National Bank of Hungary will start buying mortgage-backed securities from January in its latest move to bring investors to heel and drive down interest rates. Departing from the approach of most small central banks focusing on short-term rates and inflation targeting, it’s looking to influence longer-term lending to home buyers and a government with one of the highest debt levels in eastern Europe.

The goal is to boost growth that has lagged other economies in ex-communist Europe and prevent a return of the explosive foreign-currency borrowing that forced Hungary into a 2008 IMF rescue. Almost 10 years after it struggled to contain a crumbling financial industry and ward off aggressive market speculators, the central bank has taken a forceful approach with lenders’ who have been loath to give up margins on loans.

“There are two things of which even our staunchest critics won’t accuse us: that we haven’t been sufficiently activist or creative,” Vice Governor Laszlo Windisch told a room full of banking executives on Dec. 4. “Our dear banking colleagues here surely have felt this in our deliberate and forceful actions.”

Expanding its unconventional arsenal, the central bank will assume interest-rate risk from lenders for up to 10 years by selling interest-rate swaps starting in January. They’ll also buy as much as 500 billion forint ($1.9 billion) in mortgage notes.

That’s a departure from other central banks across the continent that are considering tightening. Rate setters in the Czech Republic were the first in Europe to raise their benchmark twice this year, and Poland and Romania will probably start hiking next year.

Some Hungarian bankers balked at the central bank’s latest easing plans. Confronted with a skeptical crowd at a briefing last month, Vice Governor Marton Nagy dismissed their doubts as a five-minute hot take on policies his colleagues had worked on for two months. He added: "If you don’t recognize this goodwill from us, of course we have other measures."

"When they started everyone was criticizing them, but they have really done a fine job so far," said Andreas Rein, a money manager who oversees the equivalent of $1.2 billion of eastern European debt at Uniqa Capital Markets GmbH in Vienna. "As we have seen in the euro area, with a lot of forced buyers, yields can be pushed lower."

Matolcsy’s Message

The driving force behind Hungary’s monetary transformation is Gyorgy Matolcsy, a former Economy Minister and ally of Premier Viktor Orban, who took over the central bank in 2013. As minister, he was the mastermind behind an interventionist push that introduced Europe’s highest bank tax and nationalized whole industries, including grabbing about 10 billion euros ($11.9 billion) in private pension savings to bolster the state’s coffers.

As central bank chief, Matolcsy cut rates to a record low, oversaw the conversion of $12 billion in foreign-currency loans and turned on the liquidity taps to avert a credit crunch. He also helped shift as much as 1.5 trillion forint in government bonds away from Hungary’s largest foreign investors to domestic banks and households. Those steps largely freed the central bank from the scrutiny of hot-money foreign investors that have punished Turkey and Romania in the past.

"Even the most skeptical observers do not appear concerned that the NBH’s stance is creating fundamental imbalances in the country," Morgan Stanley economist Pasquale Diana said in a Dec. 5 report.

When to Stop

The steps have helped cut 10-year government bond yields to a record low 2.08 percent last week, compared with over 10 percent when Matolcsy was minister in 2011. The yield was 2.11 percent on Wednesday. The three-month interbank rate, the main measure of financing conditions in the economy, is almost zero.

Widening the maneuvering room is inflation, which remains at the lower end of the central bank’s 2-4 percent target range. The forint has also been kept at bay by growing household savings and the largest current-account surplus since the fall of communism. Now for Matolcsy, the biggest challenge of his unorthodox approach may be deciding when to stop.

"They still have the capacity to shift to tighter policy," said Eszter Gargyan, an analyst at Citigroup Inc. "Their will to do so remains the main question for the market."

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