12 July 2016

Following the decision by the Monetary Council of the Magyar Nemzeti Bank, from August 2016 the Bank’s three-month deposit tender will be announced once a month instead of the current weekly frequency. From October 2016, the MNB will limit the amount of bids by banks accepted at the tender. The targeted, unconventional measures will support the MNB’s schemes to stimulate bank lending and its self-financing programme by directing bank liquidity.

At its meeting today, the Monetary Council decided to gradually limit access to the Bank’s main policy instrument. This will mean the implementation of two steps building on each other, as follows.

  • As a first step, from August 2016 the Bank will accept deposits under its three-month deposit instrument once a month instead of the current weekly frequency. The tenders will be announced each month on the Wednesday following the Monetary Council’s policy meeting. By reducing the frequency of tenders, bank liquidity will be dispersed over three series instead of the current 13, which will result in a significant concentration of deposits. The first deposit maturity date when the MNB will not conduct a tender is 3 August 2016.
  • As a second step, from October 2016 the Bank will impose a limit on the amount of bank liquidity that can be placed in three-month deposits. The MNB will make a decision on the operational details of the limit as well as the related auction technique and allocation mechanism in September 2016, about which it will inform the banks and the general public. The first tender day when the MNB will announce its three-month deposit with a quantitative limit is 26 October 2016.

The above steps are expected to facilitate a decline in market rates by crowding out excess liquidity remaining at banks from the policy instrument. As liquidity crowded out may flow into the interbank market and the government securities market through the Bank’s other existing deposit instruments, the resulting interest rate effect is likely to arise in these sub-markets, supporting the Bank’s schemes to stimulate bank lending and its self-financing programme. The outflow of liquidity from the three-month deposit is likely to start as the reduction in the frequency of tenders begins, i.e. liquidity can start flowing into the government securities market and turnover in the interbank market can rise even during the phase of lowering the frequency of tenders.

Limiting access to the three-month deposit instrument is expected to lead to adjustment by banks, which the MNB will monitor on a continuous basis, in particular as regards the use of its deposit and lending facilities, movements in interbank rates (BUBOR) and developments in the government securities market. The MNB will set the quantitative limit in the light of experience with the period of lowering the frequency of tenders. The MNB may decide to use fine-tuning operations depending on actual adjustment by banks.

Magyar Nemzeti Bank