MNB Warns of 'Harmful Consequences' of Rate Caps

MNB

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Interest rate caps the government has rolled out for households with mortgages and SMEs may reduce borrowers' repayment burden, but also have "harmful consequences", including a weakening of monetary policy transmission, the National Bank of Hungary (MNB) said in a report published on Thursday.

The central bank and financial market watchdog argued that the rate caps are a direct cause of banking sector losses that could increase additional write-downs after the measure is phased out. It also said the policy has a negative effect on local financial culture and increases moral hazard.

In its current form, the measure ensures an "advantage of an unjustified degree" to borrowers with higher-risk, variable-rate mortgages, it added.

MNB noted efforts it has taken over the years to promote mortgages with fixed, long-term rates and said it calculated that retail borrowers with fixed-rate mortgages are saving HUF 609 billion over the period between mid-2017 and the end of 2023 compared to a scenario in which they took out variable-rate credit.

The central bank said the rate cap for SME borrowers, which runs from November through the first half of next year, would cause lenders HUF 54.3 bln-58.3 bln in losses, while a six-month extension, through June 2023, of the rate cap for retail borrowers with mortgages would translate as an HUF 80.5 bln loss for banks.

Lenders' losses on the mortgage rate cap in 2022 are set to reach HUF 71.4 bln.

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