Economy
INSTANT VIEW - Hungary central bank announces new 2-yr lending facility
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Gyula Tóth, UniCredit, Vienna
“At first look the move should support the short end of the HGB curve which is currently trading about 150bp above the 7% policy rate. Having talked to the NBH earlier our understanding is that the bank does not intend to provide this amount of carry for the banking sector given the new lending facility will be provided at variable rate. We were told that the re-pricing period of the variable LTRO is still up to negotiations with the local banks. We were mentioned potentially 3M re-pricing period but also 1y as possibility.
“Clearly the banks will likely push for longer re-pricing period. The facility in this for looks very similar to the ECB 3y LTRO which had significant positive impact on short end EMU periphery bond markets. We note however that in case of the EMU the spread between the policy rate and the short end periphery bond yields was much higher (in excess of 400bp) than in the case of Hungarian policy rate and 2y HGB yields.
“Currently the total volume of the mortgage bond market is HUF 1796bn (HUF 528bn FHB bonds and HUF 1268bn OTP Mortgage bank bonds). In case all outstanding mortgage bonds end up in the NBH as collaterals the facility could provide a maximum HUF 1796bn long term funding. This compares with a total outstanding HGB bonds up to 2y of HUF 2705bn.
“Although the direct impact largely depends on the actual re-pricing period we believe the move should support the short end of the HGB curve. On the other hand as the spread between the current policy rate and the short end of the HGB curve is only 150bp we do not expect such a big rally like in the EMU periphery bond markets where the spread was more than 400bp when the ECB provided the first 3y LTRO.
“We would also expect the Bubor rates coming closer to the policy rate which will also push FRAs lower. Currently the 1y Bubor is fixed at 7.90% or 90bp above the policy rate. Here again the direct impact will largely depends on what will be the re-pricing period.
“In terms of lending dynamics we expect muted impact in the near term as the banking sector as a whole already has significant amount of excess liquidity.. According to the latest data the banking sector has an excess liquidity of HUF4022bn currently parking at the 2week NBH bills. These bills are paying the 7.0% policy rate. We think the long term funding obviously only makes sense if the re-pricing period is definitely longer than 2 weeks."
Orsolya Nyeste/Zoltán Árokszállási, Erste, Budapest
“The aim of the new tools is to boost the current poor lending activity of the Hungarian banking sector. Liquidity constraints (especially in FX) in the banking sector as well as decreasing capital buffers as a result of the introduction of the FX prepayment scheme and a deterioration in the quality of loan portfolios are the most important barriers to normal lending activity of credit institutions which negatively affect GDP growth.
“The announcement is positive for Hungarian markets, as it significantly increases the maturity at which banks can receive forint financing from the central bank at the policy rate (7%). The new tools should decrease the current liquidity constraints in the banking sector.
“The scheme seems similar to the one launched by the ECB in December, albeit it carries the risk that if the policy rate is increased, then the cost of this financing facility also increases. This also means that the government still has to do its homework and cannot pursue an economic policy which might increase risk aversion and can trigger further monetary tightening.
“The main impact of the two-year refinancing is likely a decrease of government bond yields. The introduction of the mortgage bond purchase programme may have a favorable impact on retail lending, but this impact is very difficult to be quantified at the moment given the necessary amendments in the legislation which we do not see clearly yet.
“Overall, the news is positive for both the forint and bonds, while on the longer run, it also has the potential to enhance lending and improve the economic output, but this latter impact is difficult to be quantified at the moment. We continue to expect yield decreases and forint appreciation towards the year-end.
“Our current forecast is 282.5 for the EUR/HUF and 7.9% for 10Y yields at the end of this year, but the appreciation can be stronger than expected due to this news. The forint strengthened to a new 5-month high on the news."
“At first look the move should support the short end of the HGB curve which is currently trading about 150bp above the 7% policy rate. Having talked to the NBH earlier our understanding is that the bank does not intend to provide this amount of carry for the banking sector given the new lending facility will be provided at variable rate. We were told that the re-pricing period of the variable LTRO is still up to negotiations with the local banks. We were mentioned potentially 3M re-pricing period but also 1y as possibility.
“Clearly the banks will likely push for longer re-pricing period. The facility in this for looks very similar to the ECB 3y LTRO which had significant positive impact on short end EMU periphery bond markets. We note however that in case of the EMU the spread between the policy rate and the short end periphery bond yields was much higher (in excess of 400bp) than in the case of Hungarian policy rate and 2y HGB yields.
“Currently the total volume of the mortgage bond market is HUF 1796bn (HUF 528bn FHB bonds and HUF 1268bn OTP Mortgage bank bonds). In case all outstanding mortgage bonds end up in the NBH as collaterals the facility could provide a maximum HUF 1796bn long term funding. This compares with a total outstanding HGB bonds up to 2y of HUF 2705bn.
“Although the direct impact largely depends on the actual re-pricing period we believe the move should support the short end of the HGB curve. On the other hand as the spread between the current policy rate and the short end of the HGB curve is only 150bp we do not expect such a big rally like in the EMU periphery bond markets where the spread was more than 400bp when the ECB provided the first 3y LTRO.
“We would also expect the Bubor rates coming closer to the policy rate which will also push FRAs lower. Currently the 1y Bubor is fixed at 7.90% or 90bp above the policy rate. Here again the direct impact will largely depends on what will be the re-pricing period.
“In terms of lending dynamics we expect muted impact in the near term as the banking sector as a whole already has significant amount of excess liquidity.. According to the latest data the banking sector has an excess liquidity of HUF4022bn currently parking at the 2week NBH bills. These bills are paying the 7.0% policy rate. We think the long term funding obviously only makes sense if the re-pricing period is definitely longer than 2 weeks."
Orsolya Nyeste/Zoltán Árokszállási, Erste, Budapest
“The aim of the new tools is to boost the current poor lending activity of the Hungarian banking sector. Liquidity constraints (especially in FX) in the banking sector as well as decreasing capital buffers as a result of the introduction of the FX prepayment scheme and a deterioration in the quality of loan portfolios are the most important barriers to normal lending activity of credit institutions which negatively affect GDP growth.
“The announcement is positive for Hungarian markets, as it significantly increases the maturity at which banks can receive forint financing from the central bank at the policy rate (7%). The new tools should decrease the current liquidity constraints in the banking sector.
“The scheme seems similar to the one launched by the ECB in December, albeit it carries the risk that if the policy rate is increased, then the cost of this financing facility also increases. This also means that the government still has to do its homework and cannot pursue an economic policy which might increase risk aversion and can trigger further monetary tightening.
“The main impact of the two-year refinancing is likely a decrease of government bond yields. The introduction of the mortgage bond purchase programme may have a favorable impact on retail lending, but this impact is very difficult to be quantified at the moment given the necessary amendments in the legislation which we do not see clearly yet.
“Overall, the news is positive for both the forint and bonds, while on the longer run, it also has the potential to enhance lending and improve the economic output, but this latter impact is difficult to be quantified at the moment. We continue to expect yield decreases and forint appreciation towards the year-end.
“Our current forecast is 282.5 for the EUR/HUF and 7.9% for 10Y yields at the end of this year, but the appreciation can be stronger than expected due to this news. The forint strengthened to a new 5-month high on the news."
