8 September 2020
On Tuesday, Magyar Nemzeti Bank (MNB) took a decision on a set of measures to improve the effectiveness of monetary policy transmission and simplify its instruments. By announcing a swap instrument providing foreign currency liquidity, the MNB will ensure that the volatility of domestic FX swap market yields at the end of the quarter is reduced significantly and that yields are in line with the level of short-term rates set by the Monetary Council. In addition, the Monetary Council decided to make other technical modifications affecting reserve requirements and the collateralised lending facility.
In line with the Magyar Nemzeti Bank’s decision, swap tenders providing central bank foreign currency liquidity will be introduced in necessary cases to facilitate monetary policy transmission, in addition to the regular announcement of swap tenders providing forint liquidity. The Monetary Council has indicated several times that it wishes to keep a secure distance from zero regarding short-term rates. In particular, it is a key priority for the MNB that short-term rates in every sub-market at all times should be formed consistently with the level of short-term rates deemed optimal by the Monetary Council.
The aim of introducing swap tenders providing foreign currency liquidity is to achieve this goal. At the end of recent quarters, during periods of balance sheet adjustment by banks, there have been high volatility and a temporary decline in yields in the foreign exchange swap market playing a crucial role in terms of changes in short-term rates and interbank liquidity management. By introducing these tenders, the MNB aims to ensure that in these special periods, short-term money market yields adjust to the level of short-term rates deemed optimal by the Monetary Council and their volatility is reduced significantly.
The MNB is ready to manage potential market volatility by holding swap tenders providing foreign currency liquidity, entering the new quarter at the end of September. The MNB will inform its counterparty banks of the detailed conditions of swap tenders providing foreign currency liquidity with a maximum of two-week maturity. The MNB may use its international master repurchase agreements providing euro liquidity to finance the swap instrument.
The MNB took its decision in line with the Financial Stability Board’s decision on modifications to macroprudential rules. In addition to maintaining financial stability, banks’ more flexible liquidity management is also supported by the fact that the MNB’s Financial Stability Board repealed the tightening regulations, implemented in the spring of 2020, on certain macroprudential financing rules, e.g. the foreign exchange funding adequacy ratio (FFAR) and the foreign exchange balance ratio (FXBR), and it also fine-tuned the requirement relating to the interbank financing indicator (IFI).
Furthermore, the Monetary Council took a decision on several additional technical modifications related to the central bank instruments. Due to a significant expansion in interbank liquidity, the Monetary Council decided to restore the sanctions, suspended on 24 March 2020 in response to the effects arising from the coronavirus pandemic, to be applied in the event of credit institutions’ reserve deficiency, with effect from 1 October 2020. The measure provided effective support to banks to manage their liquidity; however, it is no longer warranted in the face of increased banking system liquidity in recent months. The Monetary Council also decided that from 1 October 2020, the interest rate on the portion above the reserve requirement on reserve accounts should be the lower of the current central bank overnight deposit rate and 0 percent.
As regards the instruments providing liquidity, the MNB decided that it will only announce tenders of its long-term collateralised lending facility with three and five-year maturities. Weekly tenders with maturities of up to one year, including three, six and twelve-month maturities, will not be announced. To achieve technical simplification, investment funds’ indirect access (i.e. through banking sector participants) to the collateralised lending facility will be discontinued. However, direct access will remain available for the investment funds involved.
The central bank instruments not affected by the above decisions will remain available with unchanged conditions for counterparty banks.