Interest rates, assessment all kept unchanged at today's Monetary Council

HUNGARY - In Brief 22 Jul 2025 by Istvan Racz

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The regular monthly rate-setting meeting of the Monetary Council was held this morning. Nobody expected any change, and there was none either, except a reduction of the mandatory reserve ratio for banks, from 10% to 8%, starting from August 1. Why is the latter essentially unimportant? Because the banking system works with a very substantial amount of excess reserves: on July 6, the latest date for which this data has been made publicly available, total liquidity (reserves) reached HUF9301bn, against which the total reserve requirement for banks is HUF4193bn in July. Importantly, the MNB equally pays the 6.5% base rate as interest both on required and excess reserves. Why are they still cutting the reserve requirement ratio? Because the distribution of excess reserves may be uneven among banks, and so there may be banks which need to rely on the domestic money market more than the others. For sure, this could be regarded as their private problem, but it is still true, that between end-February and end-June, the stock of the 5-year refinancing loans, extended by the MNB during Covid, at a fixed interest rate of 0.9% only, fell from HUF2576bn to HUF1305bn, because of withdrawals at maturity. This improved the MNB's P&L, of course, (it was high time as the MNB is still loss-making and has a substantial amount of negative capital) but at the same time it reduced banks' profitability and narrowed the system's overall liquidity. So the Monetary Council decided to provide some compensation for this latter effect, saying that the upcoming reduction of the reserve requirement, together with the withdrawal of cheap refinancing loans, is likely to have a 'neutral impact on moneta...