Hungarian banks should boost lending to prepare for a persistently low interest rate environment, the deputy governor of the Magyar Nemzeti Bank (MNB) said on May 12.

The MNB warned investors against "exaggerated" rate cut expectations after it lowered the benchmark by 15 bp to 1.05% on April 26.  MNB’s deputy governor Marton Nagy even announced on May 10 that the easing cycle may end this month, however, backtracked on his comments the following day. His recent caveat about a "persistent" low interest rate environment may support his latest change of track.

"(Low interest rates) pose an important challenge to the banking system to maintain profitability," Nagy said, according to Reuters. "Hungarian banks never faced such low interest rates. They need to prepare for this, and this is a very serious challenge to the banking system."

Nagy added that a 100 bp reduction of the benchmark rate would result in an annual profit decrease of HUF20-30bn (€63.4-95.2mn) of the Hungarian bank system, according to Portfolio.hu.

The reason for mentioning a 100 bp decrease of the benchmark rate is unclear. Since the beginning of the MNB’s easing cycle on March 22, rate setters lowered the benchmark by 30bp. While they frankly stated that more is on the way, the minutes of the Monetary Council’s latest meeting on April 26 show that “several members emphasized the need for caution in relation to the extent of the continuation of the cycle”.

The swift rebound in CPI in March is likely to reopen debate over the length and depth of the current easing cycle. Citibank analysts expect the MNB “may halt cuts in June or July at 0.90% or 0.75%”.

However, what is clear is that the MNB hopes to use the lowered rates to help in its ongoing efforts to persuade banks to increase lending. Credit to the real economy has shrunk severely since the Fidesz government came to power in 2010, and waged a bitter campaign against the banks. It has now lightened its regulatory and tax touch, but lending is still sluggish. The banks maintain that demand for credit is slow.

Banks need to start to raise their loan-to-deposit ratios immediately, Nagy stressed at a conference. Reaching a 10% return on equity will be a challenge due to ever stricter capital requirements, he noted.

The MNB wants to exit its 'funding for growth' scheme of the past few years by getting commercial banks to raise lending to SMEs. The central bank expects SME lending to rise 5-10% annually in the coming years, Nagy said.