More refinancing, bond purchases and selectively higher interest rates from the MNB

HUNGARY - In Brief 07 Apr 2020 by Istvan Racz

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Well, no one can rightly accuse the MNB of not being inventive in these days. True, they have to reach different objectives at the same time, including: (a) providing enough liquidity under crisis circumstances, to keep water running in the pipe at all times; (b) to provide more refinancing, with a view to supporting the virus-hit economy; (c) to control the EURHUF exchange rate, in order to contain inflationary pressures and protect official FX reserves at a time when the fundamental part of the BOP is being hit seriously; and (d) to provide funds for the government, with a view to enabling fiscal policy to fight the Covid-19 crisis.To achieve all of this at the same time, the Bank announced the following policy changes today:- the interest charged for O/N and 1-week collateralised loans goes from 0.9% to 1.85%, reestablishing a symmetrical interest rate corridor;- the interest paid on the recently introduced 1-week deposit (of which no less than HUF 655bn was placed with the Bank last Thursday) remains 0.9%, the same as the unchanged base rate, but it will become flexible, so that the MNB will set its specific level for each of its weekly tenders;- the Bank will start buying government bonds on the secondary market, and it will renew its program to buy mortgage bonds issued by domestic banks, in order to secure long-term funds to the latter;- starting from Q2, the Bank will no longer set a target for the minimum level of unsterilised excess reserves of the banking sector, to increase its flexibility in liquidity regulation;- the Bank is extending its existing zero-interest refinancing loan program to fund bank lending to SMEs, including working capital credit up to 3...