We don't need the MNB's balance sheet to stimulate the economy - c.banker

The world is changing around us

In a broadcast led by Ádám Banai, the Managing Director of the MNB, Zoltán Kurali shared his personal impression that the work of the central bank had largely met his expectations, and that MNB employees were clearly committed to serving the public good. Having previously worked in the market himself (most notably as head of Deutsche Bank in Hungary), he is accustomed to constantly monitoring market developments and still considers this his duty as a central banker.

However, there is a significant difference: whereas he previously solved customers' problems, at the central bank he must act in the long-term public interest

while bearing in mind the MNB's primary objectives of maintaining price stability and ensuring financial stability.

The Deputy Governor highlighted the complexity of the environment in which the central bank operates. Although the European Central Bank has met its inflation target at the pan-European level, it must also take into account the different inflationary processes in individual eurozone countries. In the US, the Fed not only pursues price stability, but also labour market goals. In Japan, the central bank has had to work for a long time to finally achieve inflation due to its ageing society. The reversal of globalisation is accompanied by increased inflationary risks,

as efficiency gains from global linkages are reversed, making the distribution of goods less optimal.

For a long time, the market clearly regarded US Treasury yields or the Fed funds rate as risk-free returns, to which investors added a certain premium when pricing various assets. However, as the US began to break down some taboos, such as the independence of central banks and tariff policy, the role of US bonds in investment portfolios declined while their volatility increased. It is now questionable whether US bonds should be used as the benchmark against which we price everything.

Zoltán Kurali also spoke at the Portfolio Budapest Economic Forum event:

This has led to an increase in the value of gold in the eyes of investors, even though it does not pay interest. Shares have also increased in price, which is understandable in light of all this. Gold now appears to have taken on a greater role, with central banks, portfolio managers and the general public holding more of it. However, Kurali is unsure whether this will continue and believes it is more likely to change. However, compared to real estate, gold has the clear advantage of retaining its value: an ounce of gold is always an ounce of gold.

Although Hungary's public debt, at around 75% of GDP, is lower than the eurozone average of over 80%, the euro is a reserve currency. This means that a significant proportion of institutional investors are obliged to hold it. This is not the case for Poland, Romania or Hungary, so we should compare ourselves to countries in the region that are in a similar situation, rather than to the eurozone.

The good news is that we are performing well in terms of flow indicators, such as the budget and current account balances. However, we are performing less well in terms of stock indicators, and it will take time for strong Hungarian brands to be able to compete with those of many of our regional partners.

IN ORDER TO MOVE AWAY FROM THE LEGACY OF THE COUNTRY BEING ONE BIG ASSEMBLY PLANT, WE NEED TO EMBRACE INNOVATION AND IMPROVE EFFICIENCY.

When it comes to central bank reserves, Kurali said that the aim is to ensure the country's economy has sufficient foreign currency reserves, considerable room for manoeuvre, and a surplus. The MNB determines reserve adequacy by stipulating that the country must hold reserves substantially greater than its external debt.

Reserves are therefore a risk management tool. The cost of this is that they are denominated in foreign currency, while the MNB's liabilities are primarily in Hungarian forints. The difference between the two interest rates represents a cost to the central bank. This is why it is necessary to find the optimal level of reserves. Zoltán Kurali advocates conservative reserve management, whereby the MNB takes on some risk for yield, but never excessive risk. Gold accounts for 20% of reserves, which is comparable to the ratio in similar countries.

A clear mandate

The Deputy Governor has a clear opinion on the role of the MNB. The central bank must perform its monetary policy tasks as set out in the law:

price stability above all else, and financial stability, while supporting government economic policy and sustainability goals without prejudice to these two objectives.

At the end of last year and the beginning of this year, we realised that inflation had escaped from the bottle again for several reasons. Perhaps it had never been bottled up in the first place — we just thought it had, Kurali said in the interview. He attributes this to a cycle of price changes in the global food market, the weakening of the forint in the fourth quarter, and several demand shocks caused by a combination of old and new factors (e.g. the wage agreement).

The combination of these factors caused inflationary pressure and a tendency among economic actors to raise prices, driven by natural and risk management factors, as well as opportunism. The central bank can address this by

attempting to achieve and maintain a real interest rate that encourages saving, thereby reducing demand pressure.

This is why the Monetary Council has repeatedly decided to keep the base rate unchanged at 6.5%. Consistent communication and action are needed to ensure that market participants understand they are not being left to manage risk alone and that their inflation expectations can gradually decline.

Although all such interventions carry risks, these were mitigated by the government's margin caps and the price monitoring system. These measures improved perceptions of inflation and made prices more transparent, raising consumer awareness and stimulating competition while positively influencing expectations.

So now it's clear to the market that both the central bank and the government are committed to curbing inflation. This helps to anchor expectations.

The central bank's balance sheet is not needed to stimulate the economy, he stated clearly. One reason for this is that the banking system and companies are still flush with liquidity, which was provided to them during the coronavirus pandemic. "The money is there with the companies," he said, adding that companies' liquid assets as a percentage of GDP are almost 30%, households' liquid financial assets are close to 70%, banks' loan-to-deposit ratio is around 70%, and banks hold over HUF 4,000 billion in overnight deposits because "they have no better idea."

so There is no need for more liquidity; what is needed is for the existing liquidity to start working.

The central bank therefore decided to stimulate competition between banks and reduce administration by standardising the loan application process, including standard documentation, maximum pricing and maximum assessment times. The Certified Corporate Loan, launched by the central bank, does not utilise central bank resources, but rather the capabilities of banks. Six banks have already joined the programme.

The central bank hopes that the product will stimulate the SME credit market and invigorate corporate lending for investment purposes, since delaying investment can result in companies' capital depreciating. While the banking system understands the situation and is cooperating with the central bank, it will still need to work hard to stimulate investment.

Zoltán Kurali generally supports market solutions, but of course there are market anomalies when intervention is necessary, without hesitation.

However, when capital, resources, credit and liquidity are available, there is no need to add fuel to the fire. Only calculated risks should be taken.

When things are going well, it is worth building up reserves, so that when things go wrong, there is room to manoeuvre and intervene. "Burning the candle at both ends is not my way of doing things," said the Deputy Governor.

At present, no significant risk factors can be identified in the banking system.

The ratio of non-performing loans is low, and the amount of capital in excess of regulatory requirements is HUF 2,200 billion. Furthermore, mortgage loan penetration relative to GDP is low.

Of course, debt break rules must be monitored continuously, and if there is a risk, it is the low utilisation of commercial real estate. However, this is not something to be overly concerned about. It is important that banks continue to adhere to the lending practices learned after the 2008 crisis.

Cover photo: Portfolio