Hungarian National Bank to lower frequency of three-month deposit instrument

The Hungarian central bank has introduced a new approach to quantitative easing that will take advantage of the ‘micro-structure’ of the banking system and the money market. On Tuesday, the MNB stated that it will lower the frequency of tenders of its key three-month deposit instrument to once in a month from weekly, starting in August. The central bank will also limit the total volume that it consents to on this facility. At present it agrees to all liquidity that is offered by banks.

With these measures, the central bank intends to urge banks to lend more to the corporate sector by making passive deposits look less attractive and less flexible, noted Commerzbank in a research report. According to the Hungarian central bank, if it did not take in as much excess liquidity from banks as it is currently absorbing, market interest rates might drop and banks would be compelled to lend to corporates or invest in government bonds. This might result in pushing down the yields further.

This change is viewed as HUF neutral, said Commerzbank. It is the central bank’s job to attempt and seek ways to make credit traction; however, this challenge in a low-growth regional scenario, particularly as one major round of investments in the auto sector has just finished, stated Commerzbank.