Baluarte
04-05-2013, 01:58 PM
By MARGIT FEHER and VERONIKA GULYAS
BUDAPEST—Hungary's central bank ventured into unconventional territory Thursday, saying it plans to offer interest-free money for loans to small and midsize businesses and help them convert burdensome foreign-currency loans into local forints in an effort to boost the economy.
Markets have been watching closely to see how the National Bank of Hungary's new governor, Gyorgy Matolcsy, would redirect monetary policy. He is a close ally of Hungarian Prime Minister Viktor Orban, who had urged the bank's previous leaders to be more aggressive in backing growth.
"Central banks are actively taking part these days in jump-starting growth," Mr. Matolcsy said. He said the bank's new initiative is "precisely targeted to support growth and limited in its size and duration."
Hungary's New Central Bank Chief to Break Silence
The bank's program echoes a similar effort by the Bank of England to boost lending to companies in the U.K.—which critics say has failed to meet its goals—and it is far less sweeping than the major monetary easing plans unveiled by the Bank of Japan.
"This program will help Hungary at the margins but could have been bolder," said Neil Shearing, a London-based economist with Capital Economics. "It does not fundamentally address the economic weaknesses of the Hungarian economy."
The bank intends to partly fund the plan with foreign-exchange reserves, which would fall by about €3 billion ($3.85 billion) if businesses avail themselves of all the aid on offer, Mr. Matolcsy said. Reserves stood at €35.89 billion at the end of February.
The central bank predicts the program will add as much as 0.3 percentage point to gross domestic product this year, and a similar amount next year. Previously, the bank had forecast GDP growth of 0.5% for 2013. The government, which faces elections next year, had estimated 0.9%.
More photos and interactive graphics
Under the plan, the central bank will provide as much as 250 billion forints ($1.06 billion) to commercial banks at 0% interest if they lend it to small and midsize companies at rates of 2% or lower. Such loans generally have interest rates above 10%.
The second pillar of the program will devote as much as another 250 billion forints to pay the costs of converting foreign-currency denominated loans held by small and medium-size enterprises into forint loans at market exchange rates. About half of Hungary's SMEs are indebted in the euro or the Swiss franc, a legacy of the years when such loans were much cheaper than forint loans.
The central bank said it also is ready to use about €3 billion of foreign-currency reserves to help retail banks convert expensive foreign-exchange short-term funding to forints and make it possible for the government to issue more forint-denominated bonds. The move is aimed at reducing the country's external vulnerability. It will also reduce the amount retail banks use to buy the central bank's two-week bills and the amount of interest the central bank pays on the bills.
Mr. Matolcsy said the measures would be in place for a three-month test period, starting June 1. He said the bank would consult on details of the program with the government, the country's largest commercial banks and its chamber of commerce and industry.
The governor said the bank has more latitude to support growth now, because inflation is relatively quiescent. Andrea Bartfai-Mager, a member of the bank's monetary-policy council, said inflation is expected to be at or close to the bank's 3% target for the next two years.
The council, which has cut rates for eight consecutive months, approved the new plans at an extraordinary meeting on Thursday, Mr. Matolcsy said. The bank's policy rate is at a low of 5%, after a quarter-point cut in March.
The forint firmed on news of the new plan.
"The forint strengthened sharply versus the euro as markets were relieved that the central bank's program wasn't as reckless as it could have been," Equilor foreign-currency trader Szilard Buro said.
Write to Margit Feher at margit.feher@dowjones.com and Veronika Gulyas at veronika.gulyas@dowjones.com
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Seems like an amazing proposal.
BUDAPEST—Hungary's central bank ventured into unconventional territory Thursday, saying it plans to offer interest-free money for loans to small and midsize businesses and help them convert burdensome foreign-currency loans into local forints in an effort to boost the economy.
Markets have been watching closely to see how the National Bank of Hungary's new governor, Gyorgy Matolcsy, would redirect monetary policy. He is a close ally of Hungarian Prime Minister Viktor Orban, who had urged the bank's previous leaders to be more aggressive in backing growth.
"Central banks are actively taking part these days in jump-starting growth," Mr. Matolcsy said. He said the bank's new initiative is "precisely targeted to support growth and limited in its size and duration."
Hungary's New Central Bank Chief to Break Silence
The bank's program echoes a similar effort by the Bank of England to boost lending to companies in the U.K.—which critics say has failed to meet its goals—and it is far less sweeping than the major monetary easing plans unveiled by the Bank of Japan.
"This program will help Hungary at the margins but could have been bolder," said Neil Shearing, a London-based economist with Capital Economics. "It does not fundamentally address the economic weaknesses of the Hungarian economy."
The bank intends to partly fund the plan with foreign-exchange reserves, which would fall by about €3 billion ($3.85 billion) if businesses avail themselves of all the aid on offer, Mr. Matolcsy said. Reserves stood at €35.89 billion at the end of February.
The central bank predicts the program will add as much as 0.3 percentage point to gross domestic product this year, and a similar amount next year. Previously, the bank had forecast GDP growth of 0.5% for 2013. The government, which faces elections next year, had estimated 0.9%.
More photos and interactive graphics
Under the plan, the central bank will provide as much as 250 billion forints ($1.06 billion) to commercial banks at 0% interest if they lend it to small and midsize companies at rates of 2% or lower. Such loans generally have interest rates above 10%.
The second pillar of the program will devote as much as another 250 billion forints to pay the costs of converting foreign-currency denominated loans held by small and medium-size enterprises into forint loans at market exchange rates. About half of Hungary's SMEs are indebted in the euro or the Swiss franc, a legacy of the years when such loans were much cheaper than forint loans.
The central bank said it also is ready to use about €3 billion of foreign-currency reserves to help retail banks convert expensive foreign-exchange short-term funding to forints and make it possible for the government to issue more forint-denominated bonds. The move is aimed at reducing the country's external vulnerability. It will also reduce the amount retail banks use to buy the central bank's two-week bills and the amount of interest the central bank pays on the bills.
Mr. Matolcsy said the measures would be in place for a three-month test period, starting June 1. He said the bank would consult on details of the program with the government, the country's largest commercial banks and its chamber of commerce and industry.
The governor said the bank has more latitude to support growth now, because inflation is relatively quiescent. Andrea Bartfai-Mager, a member of the bank's monetary-policy council, said inflation is expected to be at or close to the bank's 3% target for the next two years.
The council, which has cut rates for eight consecutive months, approved the new plans at an extraordinary meeting on Thursday, Mr. Matolcsy said. The bank's policy rate is at a low of 5%, after a quarter-point cut in March.
The forint firmed on news of the new plan.
"The forint strengthened sharply versus the euro as markets were relieved that the central bank's program wasn't as reckless as it could have been," Equilor foreign-currency trader Szilard Buro said.
Write to Margit Feher at margit.feher@dowjones.com and Veronika Gulyas at veronika.gulyas@dowjones.com
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Seems like an amazing proposal.