The interest rate corridor shifts 25 basis points downwards

Budapest, 24 September 2015 – At its meeting on 22 September 2015, the Monetary Council of the Magyar Nemzeti Bank reduced the interest rate paid on O/N deposits to 0.1 per cent and the interest rate to be paid on O/N credit to 2.1 per cent with effect from 25 September 2015, in order to enhance the efficiency of self-financing. The Council also modified the parameters of the liquidity providing central bank credit instruments: the two-week loan was replaced by the one-week collateralised loan and the six-month loan by the three-month collateralised loan facility. 

The continuation of the MNB’s self-financing programme, announced on 2 June 2015, as well as the ensuing reform of the central bank instruments resulted in a material increase in credit institutions’ demand for government securities.  Banks have increased their government securities holdings by HUF 800 billion in the past four months and by more than HUF 1,400 billion since the announcement of the self-financing programme in spring 2014, which is in line with the objectives of the self-financing programme and contributes to the reduction in external vulnerability. The great majority of banks’ adjustment have taken place in longer-term government bonds also supported by the MNB’s IRS instrument, but demand for short-term government securities has increased as well, which has sent the three-month government security market yield to a record low.

As a result of the above, the yield on three-month discount T-bills approximated the MNB’s O/N deposit rate by mid-September, and even sank below it on certain days. This poses a risk to the continuation of the self-financing programme, as the reduction in yield differences may encourage banks to adjust through increasing the O/N deposit stock instead of raising demand in the government securities market.

At its meeting on 22 September 2015, the Council decided to reduce the overnight interest rates marking the upper and lower bounds of the interest rate corridor by 25 basis points with effect from 25 September 2015, in order to manage the above risks. This means that from 25 September the interest rate paid on O/N deposits will be equal to the base rate – 125 basis points, that is 0.1 per cent, and the interest rate to be paid on collateralised O/N loan will be equal to the base rate + 75 basis points, that is 2.1 per cent. The change in O/N interest rate levels is neutral as regards the effective interest rate; the steps taken support the use of the key policy sterilisation instrument and the efficiency of the base rate. In case banks’ adjustment will not match the central banks’ objectives, the MNB is ready to support the successful realisation of the self-financing programme with further measures.

In parallel with the above, the Monetary Council also modified the terms and conditions of the collateralised liquidity providing loan facilities announced with weekly frequency. In addition to the reduction in the interest rate on the O/N loan facility, described above, longer-term collateralised credit instruments will be available for banks under more favourable conditions and with shorter maturities than previously, in line with the majority of banks’ request to the MNB. With effect from 25 September 2015, the current two-week maturity loan will be replaced by the one-week collateralised loan, whose interest rate will be reduced to the base rate + 25 basis points. Instead of the six-month loan, the MNB will introduce a three-month collateralised loan facility which will also be announced in the form of variable rate tenders in the future.

The table below summarises the interest conditions effective from 25 September 2015.

Magyar Nemzeti Bank