MNB has announced a supplementary measure today

HUNGARY - In Brief 24 Sep 2015 by Istvan Racz

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I am sorry to return to the same subject within one day, but as it happened, the MNB has just announced a supplementary measure, in addition to those published after yesterday's Monetary Council meeting. It is about the central bank's interest rate corridor around the (unchanged) 1.35% base rate, which will be reduced by 25 bps on both sides effective tomorrow (September 25). Thus from here onwards, an asymmetrical interest rate corridor will be applied: the Bank will charge 2.1% interest on covered O/N credit, and it will pay only 0.1% on O/N deposits taken from banks. The interest margin will thus remain unchanged, of course. The MNB has just explained this measure in a communiqué, making no secret that it had to do with the Bank's desire to see commercial banks buying more short-term government debt. This is exactly the same purpose, as the one served by the early introduction of a 100% LCR for banks already from April 2016. But the problem is that the yield on 3-month Treasury bills has fallen to around the level of the central bank's O/N deposit rate recently, and so the latter has started to act as an effective floor for the former, in addition to the fact that banks could meet their LCR requirement equally by placing O/N deposits with the MNB, defying its desire to round up bank money as demand for the government treasury. In fact, the MNB has spoken warmly of domestic banks at a conference held today, praising them for buying in net terms HUF 1400 bn of HUF government debt since April 2014 (the first announcement of the 'self-financing' plan) and HUF 800 bn since June 2015 (when the second phase of the plan was announced). This time around there has been no men...