Hungarian government asks banks to introduce voluntary rate caps

Hungarian government asks banks to introduce voluntary rate caps
The Hungarian Banking Association said that lenders had taken on a "significant financial burden" in recent years and that setting rates would be the "individual and voluntary" decision of each lender. / bne IntelliNews
By Tamas Csonka in Budapest October 4, 2023

The Hungarian government has asked the country’s lenders to apply voluntary rate caps below the 13% base rate to new corporate and retail credit in order to boost lending in a bid to give a boost to the economy.

The government in exchange offered banks that it would phase out the interest rate cap for businesses if the base rate drops below 10% from 13% at present and review the retail interest rate cap. The government is also backing the banking association's regulatory efforts and plans for financial digitisation.

The ministry stressed that achieving sustainable economic growth hinges on lending. Rather than imposing a bank tax, it's crucial to channel financial resources into the economy, as the economy presently requires funding more urgently than the budget does and that could avert the freezing of the credit market and strengthen healthy lending

According to the proposal, new loans for working capital credit for businesses should be capped at 12% and the annual percentage rate for home loans (new and resale properties) as well as for home renovation, should be capped at 8.5%, the Economic Development Ministry said on October 3 after minister Marton Nagy held talks with representatives of the Hungarian Banking Association.

Home loan APRs averaged 10.12% and the average annualised rate for forint corporate loans, excluding overdrafts, stood at 14.10%, according to data from the Hungarian National Bank (MNB).

Due to surging borrowing costs, market-based lending has plunged 40-60% in 2023 and only subsidised loans, accounting for roughly half of housing and corporate outlays, are lending support to the credit market.

Government officials have called on lenders to increase lending and have stepped up criticism against the MNB  for not slashing the base rate at a faster pace. At a Tuesday conference, Nagy compared the MNB to Cyclops, referring to the one-eyed creature in Greek mythology, for focusing solely on inflation.

He said the high interest rates Hungary will likely encounter at the end of 2023 will be a constraint on economic recovery.  Nagy made it clear that the government will prioritise economic growth over fighting inflation.

In a press release issued later on Tuesday, the Hungarian Banking Association said lenders had taken on a "significant financial burden" in recent years in the interest of preserving Hungary's economic stability. "Looking ahead, [the banking sector] is committed to Hungary's financial stability, supporting solutions to advance the economy and to boost economic competition," it added.

The body said the changes could help boost lending to companies and households and revive the construction sector.

The government has yet to revise its 1.5% growth target, but even PM Viktor Orban acknowledged that Hungary's economy is expected to stagnate at best, while inflation remains the highest in the EU, three-fold above the 5.3% average at 15.3% in August.

The Banking Association called members' attention to the ministry's announcement on the interest rate caps and said setting rates would be the "individual and voluntary" decision of each lender.