The MNB will pay a spread over the base rate on longer-term deposits to banks

HUNGARY - In Brief 29 Sep 2022 by Istvan Racz

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This afternoon, Mr. Virág of the MNB spoke to analysts online, explaining mainly how the Bank's new sterilisation instruments will be used, and also on what basis the Monetary Council has decided to end their year-long series of interest rate hikes. The latter part was pretty much a repetition of what they said already yesterday, but the first part was mostly new. The following details have been revealed: 1. The new sterilisation instruments will start formally from October 1. The new scheme for bank reserves will start immediately, whereas the new deposit instrument and the regular discount bonds will be introduced as soon as the usual end-quarter liquidity measures (reverse FX swaps and discount bonds) expire, which effectively means already next week.2. As announced earlier, the mandatory reserve ratio will be raised from 1% to 5%. Over and above that, banks can undertake to permanently maintain further amounts in reserve, up to a total 10% reserve ratio, based on their individual choice. Banks have typically chosen a 6% reserve ratio, on which basis the MNB now expects that about HUF2700bn of liquidity will be sterilised through that method initially (out of total banking sector liquidity of about HUF10000bn). These amounts are currently in 1-week deposits, on which the MNB pays the base rate. The MNB also pays the base rate on bank reserves, and so we believe the net monetary effect of this change is likely to be small, although the demand for very short term funds will likely increase. From the perspective of prudential bank supervision, higher liquidity reserves should be considered as being positive, of course.3. At the start, discount bonds will be issued for ...