Hungary's central bank unveils new stimulus to bring down long yields

By bne IntelliNews November 21, 2017

The Monetary Council of the Magyar Nemzeti Bank announced new monetary policy measures at its November 21st meeting, while keeping the base rate and the overnight rates unchanged, as expected. The MNB in the previous two meetings has hinted about the launch of a new stimulus aimed at driving down yields on the longer end to help the spreads of long-maturity fixed loans.

The MNB will introduce unconditional interest rate swap (IRS) facilities with five and 10-year maturities for HUF300bn in the first quarter, available for counterparty banks at regular tenders from the beginning of January. Based on the quarterly amount, the full year figure could be around HUF1,000bn-1,500bn, adds. The revival of the IRS comes as some HUF300bn worth will mature next year and HUF1,900bn next year.

By introducing the long maturity IRS, the MNB aims to provide support to banks in increasing and stabilising their holdings of long-term government securities, thereby reducing the costs of government debt financing.

In addition, the Magyar Nemzeti Bank will launch a targeted programme aimed at purchasing mortgage bonds with maturities of three years or more, equalling HUF500bn of the HUF900bn of the total in the market. “The premium of these securities has declined, but they remain elevated, said MNB deputy-governor Marton Nagy. The MNB's intervention aims to bring premiums further down, he added.

The MNB has consulted with banks prior to launching new easing measures, he added. Hungary's bank sector is providing an adequate amount of lending to households and businesses. “It neither cools nor heats the economy," Nagy told reporters.

Both programmes will contribute to an increase in the share of long-maturity loans with fixed rates, At present, the share of these loans stands at 35%, which the MNB would like to expand to 80%, which would benefit Hungarian mortgage debtors and reduce their exposure to interest rate changes. Operational details will be worked out in the last rate setting of the year a month from now, the MNB said.

The importance of the stock and the maturity structure of central bank swap instruments providing forint liquidity will increase further as the Monetary Council does not plan to reduce further the upper limit of the three-month deposit, with a year-end upper limit of HUF75bn, according to MNB post-meeting statement.

“This is not a lending stimulus programme, but one that pushes down yields, which will help bank loan quality and their structure,” said Nagy, adding that the Monetary Council is of the view that easy monetary conditions should have an impact on not just the short but at the longer-end of the curve.

The council will closely monitor developments in monetary conditions and will ensure the persistence of loose monetary conditions over a prolonged period by using the extended set of monetary policy instruments,” it added. The previous reference to possible further easing, however, was dropped from the end of the statement.

Analysts asked by state news agency MTI see MNB's ultra-dovish policies remaining in place and normalisation of the monetary conditions to begin after 2019 and the first rate hikes a year later. CIB economist Mariann Trippon does not expect O/N rates to drop, nor a reduction of the three-month deposit. The MNB has been satisfied with the results of the non-conventional tools used already, seen in the drop of short-end yields to negative territory. "We will see how much room there is for further declines on the longer end after a recent rally, that has pushed the 10-year Hungarian bond rates below that of the same tenor US Treasury," he said.

Capital Economics holds a contrarian view. They see headline inflation rising above MNB's target of 3% in early-2018, a year earlier than the MNB's forecast. The London-based economists are of the view that the policymakers will reverse course next year and tighten policy. There’s a growing risk that loose monetary policy is kept for too long, which could result in a nastier inflation shock and more aggressive rate hikes further down the line, it added.

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