Measures to enhance the role of the central bank base rate and to simplify the monetary policy toolkit
By closing the gap between the interest rate on the overnight quick deposit tender and the base rate, monetary policy will enter a new phase, which will provide an opportunity to develop a simpler set of instruments adapting to the changed environment.
The Magyar Nemzeti Bank’s aim is to enhance the effectiveness of monetary policy transmission by strengthening the role of the base rate as a benchmark and to simplify the monetary policy toolkit without changing monetary policy conditions. In other words, the main goal is to ensure a smooth transition to the new phase without market distortions.
In accordance with the Monetary Council’s relevant decisions, central bank instruments will change as follows:
- From 27 September 2023, the central bank base rate will become the MNB’s effective interest rate.
- Until the start of the new framework, i.e. between 27 and 29 September 2023, the MNB will ensure the effective monetary policy transmission via overnight quick deposit tenders announced at the base rate. The overnight quick deposit tender will be phased out from October, with the MNB holding the last tender on Friday, 29 September 2023.
- From 1 October 2023, the MNB will remunerate balances in excess of required reserves on reserve accounts (excess reserves) at the base rate, with this instrument taking over the role of the policy instrument. Accordingly, from October the MNB will remunerate both required reserves (excluding the interest-free part), including the optional reserve ratio, and excess reserves at the base rate. From the perspective of interest accounted for in the context of required reserves, this means that credit institutions will receive interest credit on holdings of excess reserves corresponding to the base rate in the October maintenance period. The MNB will regulate interest remunerated on excess reserves in MNB Decree No 38/2023. (IX. 12.) on the interest rates related to required reserves, the relevant provision of which will become effective on 1 October 2023.
- In line with the standardisation of interest remunerated on reserve accounts and the simplification of monetary policy instruments, the optional required reserve ratio will be phased out from 2024. In the fourth quarter of 2023, credit institutions will have to hold required reserves in compliance with the reserve ratios they have chosen in September, in accordance with the current system. However, for the subsequent period, i.e. for the first quarter of 2024, credit institutions will not be able to make a declaration on the optional reserve ratio; the level of the required reserve ratio will be set uniformly at 10 per cent.
- Following consultations with credit institutions, the amount of required reserves based on monthly average balance sheet data will be determined first for the March 2024 maintenance period, and banks will have to submit new data required for this first for January 2024.
- From 27 September 2023, the pricing of central bank discount bills will be aligned with the base rate. The first auction announced aligned with the base rate will be held on 27 September 2023.
- From 27 September 2023, the interest rate on long-term, variable-rate deposits will also be the base rate. As before, the base rate will be the benchmark interest rate applied to the deposit; however, the interest rate spread will be set at 0 basis point. Thus, the instrument will bear interest at the prevailing base rate and will continue to count towards required reserves.
- The MNB will maintain its presence in the swap market under the new framework; as has been the practice in the past, T/N swap tenders will be announced on all working days with an allotment amount of EUR 6 billion.