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Press release on the widening of the interest rate corridor

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23 November 2009

At its meeting on 23 November 2009, the Monetary Council of the Magyar Nemzeti Bank decided to widen the interest rate corridor around the policy interest rate from ±50 basis points to ±100 basis points, with effect from 24 November 2009. As a result, for the Bank’s counterparties the interest rate on the overnight deposit facility will be 50 basis points lower, and that on the overnight collateralised loan 50 basis points higher, than the policy interest rate. With the reduction in the central bank base rate to 6.5%, also effective from 24 November 2009, the Bank’s overnight standing deposit rate will be 5.5% and the overnight collateralised loan rate will be 7.5%. At the same time, the interest rate on the two-week central bank loan will exceed the policy rate by 50 basis points, i.e. it will be set at 7.0%.

Shortly after the onset of the financial market turbulence in the autumn of 2008, the MNB reduced the width of the interest rate corridor, in order to avoid (i) significant losses potentially caused by increased difficulty for credit institutions in managing liquidity in a more adverse financial market environment and (ii) an increase in the volatility of short-term interbank rates stemming from market uncertainty. However, the normalisation of market conditions over recent months has provided scope to restore the width of the interest rate corridor.

The move to widen the interest rate corridor is aimed at reinvigorating the interbank market, as well as to achieve that short-term interbank rates follow the path of the central bank base rate as closely as possible over the longer term. As a consequence of the financial crisis and the substantial loss of confidence among banks, liquidity in interbank forint markets has declined sharply since the autumn of 2008. Domestic banks continue to keep their counterparty limits very low and prefer to hold central bank deposits rather than to lend in the interbank market at the shortest, i.e. overnight, maturity. As a result of these factors, the interbank overnight rate has stayed significantly below the central bank base rate for a protracted period. With an unchanged strategy, a wider interest rate corridor will result in higher costs for the banking sector, and consequently, it may encourage market participants to manage their liquidity through increased recourse to the interbank market and the two-week MNB bill. As a consequence, overnight interbank rates are more likely to be in alignment with the rate on the two-week MNB bill (which is equal to the base rate), and the improvement in liquidity in the interbank market is expected to leave more room for credit institutions to manage their liquidity.

MAGYAR NEMZETI BANK

Monetary Council