A monetary policy measure - by the debt management agency

HUNGARY - In Brief 25 Jul 2018 by Istvan Racz

---

ÁKK, the government's debt management agency has just announced a 50 bps increase in the interest it pays on fixed-rate household bonds, i.e. the special kind of HUF-denominated government debt, which is only available for purchase by domestic households. Thus the fixed interest paid on 0.5, 1 and 2 year household bonds will go up to 2%, 2.5% and 3%, respectively, against the existing market yields of 0.51-1.75% for 1-3 year debt for the bonds that are available to all kinds of investors. This measure will take effect on 30 July.Household bonds gave 25.4% of total government debt at end-June, unchanged from end-2017.ÁKK's objective was most probably to secure the appropriate flow of investment by domestic households into this kind of HUF debt, which may have become more difficult lately than before, in view of increasing inflation and the recent weakening of the forint. But the measure will have a monetary impact as well, as it affects the demand for, and so the price of, money. (The ÁKK's fixed interest rates on household bonds work a bit like a special kind of a monetary sterilization rate.) It is definitely a tightening measure, and its net effect on the money and bank credit markets will depend on the MNB's reaction to it, i.e. whether the central bank is prepared to take compensatory action to pump additional liquidity into the system, to compensate for the liquidity drained away by the ÁKK's higher bond interest rates.In our view, the Monetary Council probably discussed the implications of this measure at yesterday's rate-setting meeting, regardless of the fact that they failed to make any reference to it in their communiqué.