Hungary Will Tap Central Bank Currency Reserves

Central Bank of Hungary is set to start a 500 billion Forint program for boosting lending to help ending the recession in the country. It also plans to use the foreign currency reserves for cutting the short term external debt of the country. As a result of this decision, Forint has gone ahead on today.

The President of the Magyar Nemzeti Bank, Gyorgy Matolcsy, stated that the Central Bank may cut the reserves by 10%, something within the risk threshold. A 3-month plan will include 250 billion Forint of interest free money for the lenders to boost the corporate lending and an equal amount for the company so that the foreign currency loans in Forint can be refinanced.

On last month, Matolcsy took the office after levying the highest bank tax in Europe as the Finance Minister of the country. It contributed to the 2nd recession of Hungary in last 4 years. Earlier, he criticized the leadership of Central Bank for doing almost nothing for boosting the overall growth of the country. According to economist of Concorde Securities, Janos Samu, the new program of Hungarian Central Bank is kind of limited and it doesn’t live up to the earlier market speculations set.

Forint was able to reverse losses and then it gained 0.8% to reach to 300.22 per Euro. The yield on the 10-year Government bond of Hungary went down by 9 basis points and is currently at 6.02%.

According to the Currency Strategist of OTP, Levente Papa, the investors were kind of afraid that the new management of NBH may create huge monetary easing. However, the same disappeared after the revelation of this new program. On short term basis, this can give some sort of boost to Forint as well.

The Hungarian Central Bank seems to be emulating the Bank of England as it is now using the Funding for Lending program in an attempt to stimulate credit. Hungary’s economy contracted by 2.7% in the last quarter of 2012, if compared to the figure of 1 year earlier, marking its biggest drop in 3 years.

Under the preferential lending plan, the Central Bank is set to offer 250 billion of Forint to the commercial lenders at zero percent interest. They will do so in an attempt to extend credit to the small businesses with an interest rate not more than 2%.