Hungarian Prime Minister Viktor Orban reined in the central bank’s ability to tighten monetary policy, deepening a standoff with rate setters over the European Union’s highest inflation.
(Bloomberg) — Hungarian Prime Minister Viktor Orban reined in the central bank’s ability to tighten monetary policy, deepening a standoff with rate setters over the European Union’s highest inflation.
The government, in a decree published late Wednesday, barred local institutional investors and large retail depositors from taking advantage of central bank credit facilities yielding the key 18% rate — also the highest in the EU. Additionally, Orban’s administration extended a limit on the rate commercial banks can pay on deposits by three months until June 30.
The moves escalate a clash between Orban and central bank Governor Gyorgy Matolcsy over the direction of monetary policy. The pair, close allies until recently, have publicly blamed each other for a deepening recession, annual price growth exceeding 25% and a wobbly forint that’s been one of the most volatile globally in the past year.
The steps were announced less than a week before the central bank holds a highly-anticipated policy meeting on March 28, where it will issue new inflation forecasts and provide guidance for the future direction of borrowing costs. Matolcsy’s central bank has resisted government pressure to start lowering the 18% key rate, citing the need to rein in inflation and anchor the forint.
The currency shook off the move, gaining 0.6% to 385.16 per euro by 10:01 a.m. in Budapest, the biggest daily gain among European emerging-maket currencies. It’s been one of the favorite carry-trade investments, where traders buy assets backed by higher interest rates, such as in Hungary, with loans made in lower-yield environments.
“For now, profit seems to be more important for investors than political risks, as we would have seen an adverse market reaction by now,” said Peter Virovacz, an economist at ING Groep NV in Budapest.
The latest restrictions may have a limited impact on the forint, as they don’t restrict foreign institutional investors’ unfettered access to the central bank’s one-day deposit facility via foreign-exchange swaps with Hungarian lenders. They may even strengthen the forint by reducing local yields, cutting the cost of foreign-currency swaps and boosting profit on carry trades, Virovacz said.
Orban, who’s presided over large-scale state interventions in the economy since 2010, has used his powers to effectively ease monetary conditions, including by launching government subsidized corporate loan programs and capping mortgage interest rates.
The latest curbs affect the central bank’s twin credit facilities, which have a one-week and one-month maturity, respectively, and which have helped managed liquidity and to tighten monetary conditions along with the main one-day deposit facility. They also cap the rate commercial banks can pay on short-term deposits at the average yield on three-month government Treasury bills, which are currently below 15%, compared with the 18% key rate.
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