Hungary central bank eyes proportionate cut in three-month deposits

By Gergely Szakacs and Sandor Peto

BUDAPEST (Reuters) - Hungary's central bank will decide at its meeting this month how to lower the amount of three-month deposits it holds, but in a way that will affect depositors proportionately, Managing Director Barnabas Virag told Reuters.

Last month, the bank, led by Governor Gyorgy Matolcsy, a close ally of Prime Minister Viktor Orban, shifted to monthly tenders for three-month deposits, hoping that banks will lend more or channel funds into government debt instead.

Virag, a director in charge of monetary policy who is not a rate-setter, said in an interview that results since then had been in line with expectations.

But he declined comment on how much more the bank aimed to squeeze out of the facility, currently 1.78 trillion forints ($6.42 billion).

"Liquidity in the system is on a shrinking path anyway in the years ahead," Virag said. "The decision of the Monetary Council will define how the stock of the three-month deposit shrinks in relation to this path."

He added that the impact would be proportionate but did not elaborate on the specifics.

Virag said expectations by some analysts that the bank, which has cut its base rate to a record-low 0.9 percent and launched a raft of stimulus measures to boost the economy, might cut the three-month stock to zero were "speculation."

He added that an expected large inflow of European Union development funds would boost liquidity in the near term and the central bank also needed to take that into account when setting the quantity limits on its main instrument.

Virag also said the bank would decide on any further reforms to Budapest interbank lending market BUBOR in light of the market response to its upcoming September measures.

"Turnover (in the previously-illiquid BUBOR) was about 50 billion forints in the period between May to August on the one- and three-month horizons," Virag said. "Each year (loans) equivalent to the size of Hungarian GDP are repriced depending on changes in BUBOR.

"If BUBOR rates decline, that can also stimulate the economy and lending."

Virag added that the bank maintained its guidance on a base rate on hold at 0.9 percent for a protracted period to ensure meeting its inflation target and stimulate the economy.

He also said the government had room for some fiscal stimulus in the remainder of the year given strong budget performance so far in 2016.

"The budget can provide stimulus to a degree that does not jeopardize its other objectives (debt reduction)," Virag said, adding that the central bank maintained its forecasts for 2.8 percent and 3 percent economic growth this year and next.

Orban's government has already flagged plans for some form of fiscal stimulus but has yet to announce any details. July industrial output fell 4.7 percent, missing market forecasts. August PMI data have also signaled a slowdown in manufacturing.

(Editing by Jeremy Gaunt)

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