In addition to its primary task of achieving price stability, the Magyar Nemzeti Bank has as its main purpose to reduce Hungary’s external vulnerability and improve the currency composition of government debt. One of the tools to achieve these goals has been the self-financing programme announced in 2014, which has greatly contributed to an increase in banks’ forint government securities holdings by more than HUF 900 billion in 2014 and the first quarter of 2015, and helped the Hungarian state repay EUR 3.5 billion of its maturing debt in slightly less than 18 months raising forint funding. As a result, the foreign currency ratio of government debt fell from over 42 per cent in March 2014 to around 34 per cent in April 2015. However, this programme has reached its limits, in addition to achieving its primary objective.
In order to further encourage demand for government securities, the Monetary Council has today made the following decision:
- From 23 September 2015, the three-month, fixed interest central bank deposit will become theMNB’s key policy instrument. The two-week deposit facility will remain part of the Bank’s instruments as a liquidity management tool after 23 September 2015, but the instrument will be sold with quantity restrictions at auctions.
- The Monetary Council has been informed that a proposal is being prepared for the MNB’s Financial Stability Board on the increase in the liquidity coverage ratio (LCR) ahead of the current schedule, in order to raise it to 100 per cent as early as possible, in 2016, i.e. earlier than the international standard, by exercising Hungary’s existing national discretion.
The MNB will continue to announce interest rate swap (IRS) tenders which help banks manage their interest rate risks, thereby encouraging their demand for longer-term government securities.
As a result of the quantity restriction, holdings of two-week central bank deposits are expected to decline from HUF 5,000–5,500 billion to HUF 1,000 billion by the end of 2015. A quantity restriction will be imposed on holdings of two-week central bank deposits first from 23 September 2015; thereafter holdings are expected to fall gradually week by week to the desired HUF 1,000 billion level by the end of the year. Based on past experience, holdings of HUF 1,000 billion of two-week deposits will be sufficient to ensure that banks are able to manage their liquidity in a safe and sound manner.
The central bank base rate set by the Monetary Council will be the interest rate on the three-month deposit; resulting from the auction method, the interest rate on the two-week deposit facility will depend on banks’ demand and will be determined by market conditions. Compliance with the LCR requirement will influence the extent to which banks are able to purchase government securities, as government securities receive a more favourable treatment from a regulatory liquidity perspective than the new three-month deposit.
The above measures combined are expected to materially support forint financing of the state’s foreign currency debt, as banks will be able to comply with the strict regulatory liquidity requirements by financing the state, instead of the MNB, by stepping up their government securities purchases or increasing the supply of credit to the private sector. The continuation of the programme aimed at reducing the state’s foreign currency debt will be supported by the healthy level of the MNB’s reserve adequacy; implementation of the programme will not damage the Bank’s reserve adequacy.
The MNB will closely monitor the effects on the banking sector and financial markets of the change to its monetary policy instruments and will be ready to act in order to offset any possible unintended effects using the instruments at its disposal.