7 February 2005
In line with past practice, the government sector will continue to convert its foreign currency assets into the domestic currency involving the MNB rather than the market. Last year, the Bank decided to sell part of the amount arising from the conversion of the Government’s foreign currency borrowings to the foreign exchange market, in order to offset its effects on liquidity.
At its meeting on 7 February, the Monetary Council reviewed the past practice of channelling the Government’s foreign currency borrowings to the market and found it satisfactory. In the light of the assessment, the Council decided to continue to sell amounts arising from the conversion the Government’s foreign currency borrowings to the market in the same approach as in 2004. By carrying out such operations, the MNB’s objective is to avoid influencing developments in the forint exchange rate. In the course of the year, sales will be conducted in the interbank foreign exchange market in a price-taking manner, involving a large number of deals and small quantities, while taking into account current the market’s liquidity situation and observing OTC market practices. Potential parties to the transactions are domestic and foreign credit institutions with foreign currency trading limits with the MNB.
Conversions of the Government’s foreign currency liabilities arising from EU transfers and issues of government bonds abroad into the domestic currency are likely to result in purchases of around EUR 2.5 billion by the Bank. In part, the Bank will use this amount to increase its foreign exchange reserves and, in part, to channel it to the foreign exchange market in order to reduce liquidity surpluses, in accordance with last year’s practice.
Subject to the Government’s borrowing policy and the expected balance of EU transfers, and as required by circumstances, the MNB will continue to channel the amounts arising from net conversion by the Government to the market in the years ahead.