Hungary cenbank widens Bond Funding for Growth Scheme

The primary objective of Hungarian central bank is to achieve and maintain price stability. Without prejudice to its primary objective, the Bank preserves financial stability and supports the government’s economic policy, the MNB started its official statement after it has left monetary conditions on hold at its monthly policy meeting on Tuesday

There continues to be an exceptionally large degree of uncertainty surrounding the time profile of the coronavirus pandemic and the speed of the global economic recovery

, it stated.

Due to the second wave of coronavirus, the economic recovery takes longer than earlier expected. Overall, Hungary’s GDP is expected to decline by between 5.1 and 6.8% in 2020, which may be followed by growth between 4.4 and 6.8% percent in 2021.

Economic performance may recover to its pre-crisis level by the turn of 2022.

Inflation is expected to stay close to current levels in September, before decreasing gradually towards the end of the year due to the fall in fuel prices and base effect. In the coming quarters, developments in underlying inflation are likely to be driven by the overall balance of supply-demand frictions related to the restart of the economy and the growing disinflationary impact of weak demand.

The persistence of inflationary effects arising as a result of the economic recovery will also have an effect on the time profile of the decline in underlying inflation, which the Monetary Council will closely monitor.

The government deficit may amount to 7.0-7.5% of GDP in 2020.

The debt-to-GDP ratio is likely to rise in 2020, but is expected to move onto a downward path from 2021 once economic growth is restored and the deficit decreases.

The current account is expected to show a slight deficit in 2020 and then to improve gradually. With Hungary’s net lending position remaining persistently stable, the country’s external debt ratios will continue to decrease in the coming years, the MNB said.

It is a key priority for the MNB that short-term rates in every sub-market and at all times should develop consistently with the level of short-term rates deemed optimal by the Monetary Council. In order to ensure this, the Bank reintroduced its swap facility providing foreign currency liquidity in September. The MNB may use its international master repurchase agreements providing euro liquidity to finance the swap instrument.

At the first tender held on 18 September 2020, the MNB accepted the full amount of EUR 575 million offered by banks. The tender ensured that developments in short-term swap market yields were in line with the MNB’s base rate.

In August, the MNB increased the amount of weekly government securities purchases to HUF 40 billion to maintain the effectiveness of monetary transmission and the stable liquidity position of the government securities market. The Monetary Council will use the government securities purchase programme through a lasting market presence to the extent required. The Bank will continue to purchase government securities in the long segment.

In view of the large-scale utilisation, the Monetary Council raised the amount available under the Bond Funding for Growth Scheme to HUF 750 billion from 23 September.

The increased amount may help the Hungarian corporate bond market continue to converge to European and regional averages. 10,000 loan or leasing contracts have already been concluded with 8,000 domestic companies under the FGS Go! scheme for a total amount of nearly HUF 600 billion.

The MNB will continue to sterilise the resulting surplus liquidity issued under the programmes in full, using the preferential deposit instrument.

In the Monetary Council’s assessment, the 0.60% base rate supports price stability, the preservation of financial stability and the recovery of economic growth in a sustainable manner. In the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero. The Council remains committed to maintaining price stability during the coronavirus pandemic and pays particular attention to the persistence of inflationary effects arising as a result of the economic recovery.

If warranted by a persistent change in the outlook for inflation, the Council will be ready to use the appropriate instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 October 2020.

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