Hungary’s central bank joins ‘QE era’

Bloomberg

Hungarian central bankers are joining the quantitative easing (QE) era just as major global counterparts such as the US Federal Reserve look to leave it.
The National Bank of Hungary will start buying mortgage-backed securities from January in its latest move to bring investors to heel and drive down interest rates. Departing from the approach of most small central banks focusing on short-term rates and inflation targeting, it’s looking to influence longer-term lending to home buyers and a government with one of the highest debt levels in eastern Europe.
The goal is to boost growth that has lagged other economies in ex-communist Europe and prevent a return of the explosive foreign-currency borrowing that forced Hungary into a 2008 IMF rescue. Almost 10 years after it struggled to contain a crumbling financial industry and ward off aggressive market speculators, the central bank has taken a forceful approach with lenders’ who have been loath to give up margins on loans.
“There are two things of which even our staunchest critics won’t accuse us: that we haven’t been sufficiently activist or creative,” Vice Governor Laszlo Windisch told a room full of banking executives on Dec. 4. “Our dear banking colleagues here surely have felt this in our deliberate and forceful actions.”
Expanding its unconventional arsenal, the central bank will assume interest-rate risk from lenders for up to 10 years by selling interest-rate swaps starting in January. They’ll also buy as much as 500 billion forint ($1.9 billion) in mortgage notes.
That’s a departure from other central banks across the continent that are considering tightening. Rate setters in the Czech Republic were the first in Europe to raise their benchmark twice this year, and Poland and Romania will probably start hiking next year. Some Hungarian bankers balked at the central bank’s latest easing plans. Confronted with a skeptical crowd at a briefing last month, Vice Governor Marton Nagy dismissed their doubts
as a five-minute hot take on policies his colleagues had wor-
ked on for two months. He added: “If you don’t recognize this
goodwill from us, of course we have other measures.”
“When they started everyone was criticizing them, but they have really done a fine job so far,” said Andreas Rein, a money manager who oversees the equivalent of $1.2 billion of eastern European debt at Uniqa Capital Markets GmbH in Vienna. “As we have seen in the euro area, with a lot of forced buyers, yields can be pushed lower.”
The driving force behind Hungary’s monetary transformation is Gyorgy Matolcsy, a former Economy Minister and ally of Premier Viktor Orban, who took over the central bank in 2013. As minister, he was the mastermind behind an interventionist push that introduced Europe’s highest bank tax and nationalized whole industries, including grabbing about 10 billion euros ($11.9 billion) in private pension savings to bolster the state’s coffers.
As central bank chief, Matolcsy cut rates to a record low, oversaw the conversion of $12 billion in foreign-currency loans and turned on the liquidity taps to avert a credit crunch.