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Hungary central bank says government lending rate plan is ‘misguided’

BUDAPEST (Reuters) – Hungary’s central bank on Thursday criticised a government proposal to replace interbank rates with Treasury bill yields as the main, much lower reference rate for loans as “misguided”, saying it would reduce the scope for policy manoeuvre.

On Monday government officials proposed applying Treasury bill yields as the benchmark lending rate for corporate loans to cut borrowing costs as part of Prime Minister Viktor Orban’s efforts to revive Hungary’s economy.

A surge in inflation last year to 25%, the highest in the European Union, pushed Hungary’s economy into recession and while growth is expected to resume in 2024, a Reuters poll last month suggested it would miss the government’s 3.6% forecast.

“Such misguided measures and ad hoc ideas — such as the current plan to replace BUBOR — only harmfully narrow the room for manoeuvre in economic policy and complicate the achievement of longer-term objectives,” the bank said.

The bank’s press office did not immediately respond to emailed questions about whether this remark and the market’s reaction to the government’s plan meant a lower likelihood of the bank lowering its base rate by 100 bps next Tuesday.

The forint gained 0.5%, rebounding from three-month lows hit earlier this week on the proposal and also on the prospects for the central bank accelerating the pace of rate cuts next week.

Orban’s government, which faces European and local elections this year, has been calling on the central bank, which has cut interest rates by a combined 725 basis points (bps) since May, to do more to help the economy.

The government, which has a long track record of tax changes and other measures hitting the bank sector, believes the proposed reforms to the benchmark lending rate will boost investment and economic growth.

The central bank, however, said the proposal could backfire in various ways, such as by making banks interested in pushing up Treasury bill yields. It said comments by S&P Global, first reported by Reuters, signalled possible risks to Hungary’s credit rating.

S&P Global Financial Institutions analyst Lukas Freund told Reuters the proposal represented another example of Budapest’s unconventional policy, which aimed to boost the economy, but posed a risk to the financial sector.


Source: Economy - investing.com

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