MNB weighs future of interest-rate swaps

MNB

The National Bank of Hungary (MNB) will weigh whether the interest rates swaps it offers lenders who buy government securities are “still necessary” or have outlived their purpose, central bank deputy governor Márton Nagy said in an analysis published on Friday, Hungarian news agency MTI reported.

The MNB will consider the matter as part of a review of a program it launched two years ago giving banks incentives to buy government securities, rather than keep their liquidity in central bank deposits. By boosting lendersʼ holdings of forint-denominated FX debt, the MNB has supported a reduction in the level of FX state debt thereby the necessity of refinancing this debt in forints.  

The MNBʼs Self-financing program has “achieved the goals announced at its start”, Nagy said, citing a “significant reduction” in the external vulnerability of Hungaryʼs economy over the past couple years and a fall in long-term government security yields. He added that the phasing out this month of the MNBʼs two-week deposit, earlier its main sterilization instrument, marks the close of the restructuring of its toolkit. Conditions of the existing instruments may change, though, he added.

Demand for the central bankʼs IRSs, which it uses to share some of the interest rate risk taken by banks who buy long-term government securities, has been “intensive” over the past two years, with stock exceeding HUF 1.5 trillion in April, Nagy noted. However, demand dropped off this spring, evidence of banks adapting to the restructuring of the MNBʼs policy tools during the run of the program, he added.

“The reduction in need for banks to adapt as well as the healthier debt structure creates a new situation with a view to the central bankʼs IRS tool. ... A review of the expected changes to the value added of the IRS tool is worth reviewing, as well as the necessity and justification of its use in the future,” Nagy said.

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