Hungarian central bank raises collateralised loan rates, begins bond

• The rate increase shored up the forint, Hungary's weakening currency, while its bond purchases on the secondary market can drive down yields.
• Re-opening its lending for growth programme with 1 trillion forints ($3.06 billion) can provide funds for cash-strapped businesses.
• The one-week depo rate will be decided every week at the time of the deposit tender, which could make speculative betting on a weaker forint risky and costly, analysts said.

BUDAPEST: Hungary's central bank unexpectedly raised its collateralised loan rates on Tuesday and began a bond-buying programme along with a massive lending programme for companies to support the coronavirus-stricken economy.

The rate increase shored up the forint, Hungary's weakening currency, while its bond purchases on the secondary market can drive down yields.

Re-opening its lending for growth programme with 1 trillion forints ($3.06 billion) can provide funds for cash-strapped businesses.

The National Bank of Hungary (NBH) raised its overnight collateralised loan rate and one-week collateralised loan rate, both to 1.85pc  from 0.9pc , and said it would use its one-week deposit rate, currently at 0.9pc , flexibly within the interest rate corridor, which is now much wider.

"The Monetary Council decided to allow the interest rate on the instrument to deviate from the base rate upward or downward within the interest rate corridor," the rate-setting panel said in a statement.

The one-week depo rate will be decided every week at the time of the deposit tender, which could make speculative betting on a weaker forint risky and costly, analysts said.

"The new framework will allow a much greater flexibility for shaping monetary policy," Deputy Governor Marton Nagy told an online news conference.

"It could lead to a flattening of the yield curve, while we can achieve a loosening in the lending and asset markets (government and mortage bonds)," he added.

The bank kept its base rate and overnight deposit rate unchanged.

"The Monetary Council ... decided to launch a government security purchase programme in the secondary market to restore the stable liquidity position of the government securities market, and to re-launch its mortgage bond purchase programme to improve the long-term supply of funding to the banking sector," the council said.

Details of the programmes will be published later.

The forint strengthened to 356.70 from 359 after the announcements, extending a rebound from record lows near 370 last week.

The NBH, led by an ally of Prime Minister Viktor Orban, has helped the government to boost growth for years, often with unconventional measures.

"It is relatively rare that we see a rate increase and QE announced at the same time," said Peter Virovacz at ING.

"It is clear that the rate hike was needed because of the forint to increase their room for manoeuvre. ...It is hard to see what the overall impact will be on the forint, bond and IRS markets."