Published by the Magyar Nemze Bank Publisher in charge: Eszter Hergár H-1054 Budapest, Szabadság tér 9. - PDF

Mid-term Report Published by the Magyar Nemze Bank Publisher in charge: Eszter Hergár H-1054 Budapest, Szabadság tér 9. Contents Foreword 5 1 Introduction 9 I. Monetary policy steps

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Mid-term Report Published by the Magyar Nemze Bank Publisher in charge: Eszter Hergár H-1054 Budapest, Szabadság tér 9. Contents Foreword 5 1 Introduction 9 I. Monetary policy steps and programmes 13 2 Steps taken to meet the inflation target 15 3 Transformation of monetary policy instruments 23 4 In support of growth 34 5 Impact of monetary policy on the government budget and the mnb s role in the Fiscal Council 48 II. In support of the stability of the financial system 53 6 Achievements in supervisory integration and supervisory activity 55 7 Active use of macroprudential instruments 64 8 Conversion and settlement of FX denominated mortgages 72 9 MARK Zrt Supporting the clean-up of bank portfolios Resolution and reorganisation activity 88 III. Fostering the efficient functioning of Hungarian financial markets Financial infrastructure and the enhancement of the forint banknote by acquiring majority ownership in the BSE, the MNB targets strategic development of the Hungarian capital market 106 IV. Activities for the public good and other core central bank activities Active corporate social responsibility for the public good Structured training activity in the service of the future Wide-ranging international activity Central Bank statistics Communication activity of the MNB Central Bank results 139 References 143 List of charts and tables 150 MID-TERM REPORT Foreword Having reached the halfway mark of the Governor s six-year term that started in March 2013, it is time to present the most important results of the past three years. This was a period of trend reversals both in Hungarian monetary policy and in central banking as a whole. Many important milestones were reached the past few years, such as the cautious, but continuous implementation of the easing cycle, the introduction of the Funding for Growth Scheme to facilitate lending to small and mediumsized enterprises, the launch of the Self-Financing Programme in an effort to reduce Hungary s external vulnerability, the commencement of the Growth Supporting Programme, the integration of financial supervision, the elaboration and operation of the central bank s macroprudential strategy and instruments, the conversion of foreign currency loans into forint, the formulation of the fair banking concept, the performance of resolution tasks, the establishment of MARK Zrt., the issuance of new banknotes, and the acquisition of GIRO Zrt. and the Budapest Stock Exchange Zrt. In parallel with these developments, the Magyar Nemzeti Bank commenced a comprehensive social responsibility programme by establishing the Pallas Athena Foundations and setting up a broad-based training programme. The central bank had both the mandate and the means to carry out these tasks as, against all expectations, it avoided operating at a loss in 2013 and even with the expenditures of all of the programmes implemented between 2013 and 2015, it achieved a considerable profit while the retained earnings recorded for the period guarantee that the operation of the Bank and its programmes will not impose a burden on the budget for years to come. MID-TERM REPORT MAGYAR NEMZETI BANK This Mid-Term Report summarises and evaluates the work accomplished since March 2013 and provides an overview of the most important changes in monetary policy and its instruments, the new types of tasks and new initiatives. It also describes the evolution of the central bank s attitude in the György Matolcsy past three years, the expansion ofdrits previous tasks and the extent to which Governor, Chairman of the Monetary Councilto the period preceding the central bank s work has changed compared MAGYAR NEMZEtI BANK MAGYAR NEMZETI BANK Dr. Ferenc Gerhardt Dr Ádám Balog Márton Nagy Dr. László Windisch Deputy Governor, Member of the Monetary Council Deputy Governor, Member of the Monetary Council Deputy Governor with general Dr Ferenc Gerhardt Council of the Magyar Dr László Windisch Bank Members ofgovernor the Executive Board and deputy Nemzeti Members of the Executive Board the Monetary Nemzeti Bank deputy governor deputy governor responsibilities, Deputy Chairman of the Monetary Council ANNuAl REPoRt 2013 ANNuAl REpoRT 2014 Dr. Dr György Matolcsy György Matolcsy Governor, governor Chairman of the Monetary Council Annual Report.indd 14 Éves jelentés 2014_ENG.indd 16 6 MID-TERM REPORT :16: :10 Summary table Achievements of the MNB Measures Period Objective Result Easing cycle Funding for Growth Scheme Self-Financing Programme Growth Supporting Programme HFSA-MNB integration Macroprudential measures Settlement/ Conversion August 2012 July 2015 June 2013 December 2016 since June 2014 since January 2016 I. Monetary policy steps and programmes Achieve price stability and provide a corresponding degree of support to the real economy Facilitate lending to Hungarian SMEs Reduce Hungary s external vulnerability Stimulate commercial bank market lending activity II. In support of the stability of the financial system October 2013 since October 2013 February 2015 More efficient supervisory system Address systemic risks affecting the financial system Compensate customers for burdens incurred due to the exchange rate margin and unfair interest rate increases, eliminate exposure to exchange rate risk Fair banking January 2015 Promote healthy, sustainable competition in banking sector MARK Zrt. Resolution activity since November 2014 since September 2014 Clean up banking sector balance sheets by removing non-performing commercial real estate loans Maintain financial stability and protect customers 565-bp reduction of the base rate, which supported economic output and the medium-term achievement of the central bank s inflation target 31,000 enterprises received financing amounting to HUF 2,126 billion Vulnerability of the Hungarian economy declined significantly; Hungarian risk premiums decreased Expected result: promote lending to corporations in support of sustainable economic growth Stronger supervision, clean-up of financial sector began Set-up and operation of a new macroprudential strategy and instruments Considerable decline in households burdens, elimination of systemic exchange rate risks Facilitating the transparency of lending rates and related commissions Expected result: Ratio of nonperforming corporate loans is expected to decline significantly by end-2016 Successful MKB resolution 1 The Hungarian version of this Report was published in March The analyses were prepared in the preceding months. MID-TERM REPORT MAGYAR NEMZETI BANK Measures Period Objective Result Acquisition of GIRO Zrt. Acquisition of the Budapest Stock Exchange Zrt. New banknotes Corporate social responsibility III. Fostering the efficient functioning of Hungarian financial markets April 2014 November 2015 since December 2014 Enforce public interests in payment transactions Enhance Hungarian capital market, expand investor base, improve transmission Improve safety of cash handling and thwart counterfeiting by state-of-the art features on banknotes Cheaper payment transactions Expected result: increasing market capitalisation, the number of initial public offerings and turnover IV. Activities for the public good and other core central bank activities since May 2014 Create value, strengthen social cohesion, promote scientific thinking, improve financial awareness Education/training since 2015 Renew and enhance tertiary education and the system of economic and financial training, support scientific activity and financial literacy Renewal of 10,000 and 20,000 forint banknotes Setting up six foundations Cooperation Agreements with nine Hungarian higher education institutions 8 MID-TERM REPORT 1 Introduction In the second half of the 2000s, Hungary faced increasingly evident growth problems, large fiscal deficits, high public debt and rising current account deficits and foreign currency denominated debt. Consequently, the global economic crisis hit Hungary particulary hard. The country had been subject to the excessive deficit procedure since its entry into the European Union. In an effort to exit the procedure, after a remarkable fiscal policy turnaround, Hungary succeeded in bringing the government deficit below 3 per cent in three consecutive years between 2011 and 2013, and thus in 2013 the European Commission abrogated the excessive deficit procedure against Hungary. At the same time, the prolonged repercussions of the 2007 global financial crisis and its escalation in 2008 rendered Hungary s external economic and money market environment vulnerable. This rapidly changing, unconventional environment called for new, innovative monetary policy solutions. The turnaround in Hungary s monetary policy started in the summer of 2012 and gained momentum in March Since March 2013, the Magyar Nemzeti Bank has played an increasingly active central bank role and has taken proactive steps to fulfil the mandates entrusted to it in the MNB Act. The central bank turnaround involves numerous monetary policy measures and programmes, as a result of which the Magyar Nemzeti Bank is able to meet all its mandates. The easing cycle initiated by the external members of the Monetary Council in the summer of 2012 represented the first step of the policy turnaround. Resumed after a six-month suspension, the series of interest rate cuts lasted until July 2015 and consequently, the key policy rate reached a level of 1.35 per cent, the lowest rate recorded in the MNB s 90-year history. (Madarász Novák, 2015) By reducing commercial bank interest rates and supporting economic growth, the easing cycle contributed to the achievement of the central bank s medium-term inflation target. (Felcser et al., 2015) In addition, it brought about a favourable change in the government securities market by ensuring cheaper and safer public debt financing, while also improving the result of the MNB, which was positive in 2014 and 2015 as well. MID-TERM REPORT MAGYAR NEMZETI BANK The next significant step was the announcement of the Funding for Growth Scheme (FGS) in June In line with its purpose, the FGS considerably improved the access to credit of small and medium-sized companies, giving new momentum to the corporate credit market, which then played an important role in the turnaround in investment. (Magyar Nemzeti Bank, 2015c) During the various phases of the FGS (Phase I, Phase II, FGS+), nearly 31,000 enterprises obtained financing amounting to around HUF 2,126 billion in total. (Magyar Nemzeti Bank, 2016a) The central bank s programme made a significant contribution to revitalising economic growth and boosting employment, which together with the MNB s other measures, e.g. the easing cycle account for nearly one half of the economic growth observed in recent years. In the spring of 2014, the management of the Magyar Nemzeti Bank decided to launch the Self-Financing Programme. The programme is intended to encourage the purchase of liquid assets accepted as eligible collateral with a view to mitigating Hungary s external vulnerability by reducing the country s gross external debt. Owing to the unique features of the Hungarian securities market, the programme intensified the government bond purchases of commercial banks, which contributed to the decline in long-term government bond yields, thereby lowering the financing costs of the general government. As a result of the transformation of the main policy instrument and the asymmetric interest rate corridor, bank liquidity shifted from the central bank instrument to government securities. The central bank interest rate swap instrument introduced as part of the programme supports the management of interest rate risk and hence, facilitates bank adjustment. (Magyar Nemzeti Bank, 2015a) Consistent with its objective, the Self-Financing Programme has reduced the external vulnerability of the country. In recent years, the central bank has also taken measures aimed at financial stability and the efficient functioning of financial markets. The central bank s conversion of household foreign currency loans into forint in cooperation with the Government practically eliminated the largest systemic risk in the economy in (Magyar Nemzeti Bank, 2015c) The new regulation on fair banking was designed, among other things, to ensure the protection of debtors from unfair unilateral contract amendments, while offering an option to commercial banks to impose higher lending costs when justified. The acquisition of GIRO Zrt. and Budapest Stock Exchange Zrt. facilitates the efficient functioning of Hungarian financial markets. 10 MID-TERM REPORT Introduction Similarly, the integration of the Hungarian Financial Supervisory Authority and the creation and operation of macroprudential instruments served the interests of financial stability. This will allow the central bank to prevent the build-up of risks jeopardising economy and to ensure that the financial system s capacity to finance the economy is well-balanced. Accordingly, the central bank has become a complex supervisory authority which can guarantee systemic and institutional financial stability. In the last three years, in accordance with the provisions of the MNB Act and without prejudice to its primary objective, the MNB endeavoured to support the economic policy of the Government using the instruments at its disposal. The desired growth of the real economy requires appropriate and sustained credit growth, which has to be realised without the central bank s support in the long term. To this end, in November 2015 the central bank announced the Growth Supporting Programme (GSP), which is aimed at stimulating the market lending activity of commercial banks while the Funding for Growth Scheme is gradually being phased out. Besides the third phase of FGS, the Growth Supporting Programme also includes the Market-Based Lending Scheme (MLS), which stimulates market credit activity of commercial banks with several, primarily risk and liquidity management supporting tools. With the Growth Supporting Programme, net corporate lending, in particular the SME portfolio, is expected to increase by HUF billion in 2016, which corresponds to 5 10 per cent annual lending growth. (Magyar Nemzeti Bank, 2015b) As a result of coordinated monetary policy and fiscal policy, central bank programmes have fostered fiscal stabilisation through a number of channels. On the one hand, through the decline in government bond yields, the central bank s interest rate cuts and the Self-Financing Programme contributed significantly to the decrease in the interest expenditures of the central budget amounting to nearly 1 per cent of GDP in On the other hand, the central bank programmes and the introduction of the FGS had a positive impact on economic growth and thus, through the expansion of tax bases, they were partly responsible for the decline in the fiscal deficit to a historically low level in 2015, and a further decrease in the public debt-to-gdp ratio. MID-TERM REPORT MAGYAR NEMZETI BANK Owing to the turnaround in monetary policy, the central bank has recorded a sustained positive P/L since 2013, which in turn played a role in the abrogation of the excessive deficit procedure. Although the previous central bank management had projected a loss in excess of HUF 200 billion at the end of 2012, thanks to the reform of monetary policy the central bank recorded a positive P/L in 2013 and has remained profitable since then. While the MNB does not have a profit target, it was partly because of the monetary policy turnaround that the central bank did not have to be reimbursed for losses from the central budget, which would have added to the fiscal deficit and public debt. In the context of corporate social responsibility, the Magyar Nemzeti Bank is also participating in the renewal of higher education in the areas of economics and finance. It does so by sponsoring numerous higher education programmes, which is not financed form the central budget or the tax revenue. The central bank measures listed above were merely intended to provide a comprehensive view of the central bank s operation in recent years, as the central bank has taken several additional steps: among other things, it has taken on the role of resolution authority, launched the Central Bank Renminbi Programme and renewed the appearance of the forint banknotes in circulation. In addition to ensuring price stability and financial stability, central bank programmes will continue to make an important contribution to growth in the years to come, and the Magyar Nemzeti Bank remains committed to responding actively to potential new challenges. Connected to both the state and the market, the banking sector may become the engine of growth over the next few years, and its renewal is expected to foster sustainable growth for successful economic convergence. 12 MID-TERM REPORT I. Monetary policy steps and programmes 2 Steps taken to meet the inflation target As a result of international risk appetite increasing considerably from 2012 H2, the risk perception of Hungary improved, contributing to the reduction of stability risks. In parallel, a pronounced disinflation process began to materialise. Favourable inflation and financial market developments supported the launch of an easing cycle in the summer of Continuation of the easing cycle was also justified by the growing risk of significantly undershooting the inflation target. In line with international practice, alongside the traditional interest rate policy, the Magyar Nemzeti Bank applied additional targeted monetary policy instruments to respond to the challenges posed by a low inflation environment, restrained lending activity and the country s external vulnerability. The easing cycles significantly reduced the risk of deflation with a potential for severe real economy sacrifices, and contributed to increasing the output level. Based on the MNB s latest forecast (December 2015), persistently accommodating monetary policy conditions support the attainment of price stability over the medium term. In addition, central bank programmes are expected to improve the efficiency of monetary transmission, thereby supporting the achievement of the inflation target. 2.1 Key policy rate falls to a historical low in the easing cycle The Magyar Nemzeti Bank has made substantial interest rate cuts in recent years and deployed additional, targeted monetary policy instruments with a view to fulfilling its primary mandate of achieving and maintaining price stability. As a result of the easing cycle commenced in the summer of 2012, after a decline of 565 basis points in total, the central bank base rate dropped to a historical low level from the initial level of 7 per cent (Chart 2.1). The three-year easing cycle of the Magyar Nemzeti Bank can be divided into three phases. The commencement of the easing cycle in the summer of 2012 was initially enabled by Hungary s gradually improving risk perception and the steadily loose monetary policy stance adopted by the world s leading MID-TERM REPORT MAGYAR NEMZETI BANK central banks, while country-specific factors, such as the sustained turnaround in fiscal policy further increased the room for manoeuvre in monetary policy. During the second phase of the cycle, strong disinflation and the need to stimulate economic growth called for the easing of the monetary stance. The third phase of the cycle commenced in March 2015, when increasing downside risks to inflation pointed to the continuation of monetary easing. (Felcser et al., 2015b) Chart 2.1 Developments in the policy rate and inflation in Hungary 10 Per cent Per cent Base rate Inflation (y-o-y) 2 Source: MNB, HCSO In the first half of the easing cycle, monetary policy s room for manoeuvre was supported by both improving international risk appetite and country-specific factors. Before commencement of the interest rate cuts, the pronounced improvement in international ri
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