MNB to introduce three-month deposit as main policy instrument
The National Bank of Hungaryʼs (MNB) Monetary Council decided on Tuesday to replace the central bankʼs two-week deposits with three-month, fixed-rate deposits as its main sterilisation instrument, from September 23.
The two-week deposit will remain part of the MNBʼs instruments, but in future the central bank will place restrictions on quantity, using the auction method.
The three-month deposit will carry the central bank base rate, while the rate for the two-week deposit will depend on banksʼ demand and will be determined by market conditions.
As a result of the quantity restriction, holdings of two-week central bank deposits are expected to decline from HUF 5,000 bln–5,500 bln to HUF 1,000 bln by the end of 2015, a level that "will be sufficient to ensure that banks are able to manage their liquidity in a safe and sound manner", the MNB said.
With the measure, the MNB aims to make purchases of government securities more attractive for banks, shifting their financing to the state instead of the central bank while also increasing the credit supply to the real economy.
The MNB also announced additional measures to achieve the goal. It said the Monetary Council had been informed that a proposal is being drafted for the central bankʼs Financial Stability Board that would raise the liquidity coverage ratio (LCR) ahead of schedule, with the aim of bringing it to 100% "as early as possible, in 2016". The MNB added that it would continue to announce interest rate swap (IRS) tenders, which help banks manage their interest rate risks, thereby encouraging their demand for longer-term government securities.
Compliance with the LCR requirement will influence the extent to which banks are able to purchase government securities, as government securities receive a more favourable treatment from a regulatory liquidity perspective than the new three-month deposit, the MNB said.
Under the Basel III international regulatory framework for banks, the LCR ensures that that banks have an adequate stock of unencumbered high quality liquid assets that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30-day liquidity stress scenario. The LCR was introduced at the start of 2015 with a threshold of 60% and set to rise 10 percentage points a year until reaching 100% on January 1, 2019.
The combined measures announced on Tuesday are "are expected to materially support forint financing of the state’s foreign currency debt, as banks will be able to comply with the strict regulatory liquidity requirements by financing the state, instead of the MNB, by stepping up their government securities purchases or increasing the supply of credit to the private sector," the MNB said. Implementation of the programme to cut the stateʼs foreign currency debt will not damage the central bankʼs reserve adequacy, it added.
"The MNB will closely monitor the effects on the banking sector and financial markets of the change to its monetary policy instruments and will be ready to act in order to offset any possible unintended effects using the instruments at its disposal," the central bank said.
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