16 November 2021 To ensure the effectiveness of monetary policy transmission and to reduce end-of-year volatility in the swap market, the Magyar Nemzeti Bank (MNB) is introducing additional measures to support the stability of financial markets while continuing to use its swap facility providing euro liquidity. Following the decision by the Monetary Council today, the Bank’s monetary policy toolkit will be complemented by a short-term discount bill announced discretionally. The first auction will be held in December 2021. The MNB has also decided to asymmetrically modify the foreign exchange coverage ratio (FECR) regulation, which will provide more room for banks’ activity in the foreign exchange swap market without significantly increasing systemic risks. In addition, it has been decided to cease to announce foreign exchange swap tenders providing forint liquidity and thus to phase out the facility. The monetary policy measures aim to ensure that short-term rates are consistent with the level deemed optimal by the Monetary Council in every sub-market at all times.
To maintain the effectiveness of monetary policy transmission and to reduce end-of-year volatility in financial markets, the MNB has taken decisions to support the stability of financial markets.
- As was the case at the end of recent quarters, the MNB will hold its foreign exchange swap tenders providing euro liquidity in December 2021 with no quantitative limit, in order to counter tensions in the swap market. For over a year, swap tenders have been successful in reducing swap market tensions emerging around the end of quarters. Consequently, the MNB will continue to provide the instrument to banks at the end of the year.
- Following the Monetary Council’s decision today, the MNB’s monetary policy toolkit has been complemented by a discount bill with maturity of up to one month, announced discretionally. The MNB will provide the discount bill to banks with a quantitative limit. The instrument aims to reduce tensions in the swap market emerging at the end of quarters by supporting deleveraging by the banking sector in a targeted way. The facility will enable banks to manage existing positions with key clients in a predictable way, using a readily available instrument in periods of low liquidity at the end of the quarters. The first discount bill auction will be held in December 2021 with a maturity extending beyond the end of the year. The operational details of the discount bill will be released by the MNB until the beginning of December 2021, after consulting with the banking sector.
- Effective monetary policy transmission and the stability of financial markets are also supported by the change in macroprudential regulations initiated by the MNB’s Financial Stability Board (FSB). Considering financial market developments and systemic risks, the FSB has decided to asymmetrically modify the foreign exchange coverage ratio (FECR) limiting on-balance sheet open foreign currency position as a percentage of the total balance sheet. Due to the continuous increase in system-level foreign currency liability surplus, mainly related to customers’ foreign currency deposits, the current regulation may hinder certain institutions’ normal liquidity management which do not represent excessive exposure. Thus, the FSB has decided to change the minimum level of the ratio from -15 per cent to -30 per cent in the case of a foreign currency liability surplus and to leave it unchanged in the case of a foreign currency asset surplus. The modification will provide more room for banks’ FX swap market activity without causing a significant increase in systemic risks, thereby contributing to the achievement of the MNB’s monetary policy objectives linked to the FX swap market and the improvement in the effectiveness of monetary policy transmission. The amendment of the relevant MNB decree is expected to take effect in early December 2021, following consultations with the European Central Bank currently underway.
- Furthermore, it has been decided to cease to announce FX swap tenders providing forint liquidity and thus to phase out this facility. The Bank will not announce FX swap tenders providing forint liquidity from 16 November 2021. With the expire of the existing stock, the banking sector’s liquidity will decline by around HUF 800 billion over the next ten months. The measure also serves to reduce potential tensions in the FX swap market.
The discretional short-term discount bill, the phasing out of the FX swap instrument providing forint liquidity, and the amendment of macroprudential regulations, supplemented by FX swap tenders providing euro liquidity already in use, represent a complex package of central bank measures. The aim of monetary policy measures is to ensure that short-term interest rates are consistent with the level deemed optimal by the Monetary Council.
The diversity of instruments will ensure that, in accordance with the operational models applied by banks, the MNB supports adjustment to market developments around the end of the year using the instrument most appropriate for market participants.