Hungary's CB changes policy rate definition to encourage more govt bond holding

Hungary's CenBank changed its monetary policy framework yesterday, redefining its policy interest rate and tweaking liquidity ratios for banks in an attempt to improve monetary transmission in the economy. Beginning September, NBH will use its 3-month deposit rate as the main benchmark rate, in place of the 2-week deposit rate the bank currently uses. 

Currently, banks park about HUF 5.5trn in the CenBank's 2-week deposit facility, whereas NBH wants banks to take more risk and invest in government bonds or lend to the real sector instead. The CB wants to increase monetary transmission by reducing the incentive for banks to keep money in CB deposits - in this case, this is achieved by increasing the duration to 3-months. 

"Analysts do not view the use of one instrument vs. another for setting rates as a fundamental difference; the underlying objective stays the same, which is to influence a broad spectrum of market interest rates and cost of capital in the economy. The move had an immediate downward effect on market interest rates, and slight upward effect on EUR-HUF, which rose to above 312.00 following the announcement", says Commerzbank.