Rate-setter: MNB will apply reserves to forex loans


The National Bank of Hungary (MNB) is likely to use some of its foreign currency reserves to support a government plan to eliminate forex-based mortgage loans, although very cautiously, rate-setter Gyula Pleschinger stated in an interview with the Wall Street Journal on Friday. 

Pleschinger said he should prefer a very gradual rate cut cycle, to be followed by a relatively long period of stagnating rates. He also said the MNB should give refinance to banks in its “Funding for Growth” scheme at a rate pegged to the base rate rather than at 0% interest as at present.

Pleschinger stressed the importance of keeping the reserves at safe levels: “The central bank is absolutely committed to keeping foreign-currency reserves safely above the level required by the Guidotti-Greenspan rule and any other rules, e.g. the import rule,” he said, adding that “we have some room to maneuver” as international reserves are currently 1.5 times the country’s short-term external debt at present.

Reserves should at least equal short-term external debt under the Guidotti-Greenspan rule.
Pleschinger’s words imply the country had little less than €20.4 billion in short term external debt at the end of August, when the MNB’s foreign exchange reserves stood at €30.55 billion.

“Right now, I feel the banking association has a plan for a gradual elimination of foreign-currency mortgage debt and I feel that the government is also a partner in such a notion,” the rate-setter told the WSJ, adding that a gradual reduction of foreign-currency debt wouldn’t overburden the central bank.

Pleschinger said also said that the MNB still has some more room to cut rates but is nearing the end of the current easing cycle and needs to tread with caution to prevent a possible selloff of Hungarian assets.

In a rate-cutting cycle underway since the end of August 2012, the MNB reduced its key base rate by 0.20% to 3.60%, a new all-time low, at the end of September. Pleschinger was one of two Monetary Council members voting for a 0.10% reduction.

“In an ideal scenario, we’d do our jobs well if there were a very nice and gradual rate cut cycle, then a relatively long period of stagnating rates, and then, as economic growth starts to recover, we’d follow it nice and slow with interest rates going up if inflation picks up and exceeds the target in wake of rising growth. It would be a harmonic course of events instead of any sudden jerks,” he said.

“If a monetary shock comes, we might need to act with interest rates even if that would have a negative impact on the central bank’s financial result.”

Higher interest rates would make the bank’s “Funding for Growth” scheme more costly to the MNB, the rate-setter admitted.

Under the scheme, the MNB gives banks refinancing at 0% which they can lend to Hungary-based SMEs at no more than 2.5%.

Pleschinger suggested the central bank could tie the rate of refinancing under the scheme to the base rate through some formula to help mitigate the current system of having two central bank interest rates and to help increase the effectiveness of policy rate changes.

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