At the end of November 2022, an interest rate cap was introduced on Hungarian deposits above HUF 20 million in order to redirect investment toward government bonds. This is one of the measures in a balancing act of keeping HUF exchange rates relatively low. Since the new regulation does not affect foreign investment, it will probably not counter other measures.
MNB benchmark interest rate and its effects
In order to mitigate inflation in Hungary and keep HUF exchange rates from rising too high, in October the Hungarian National Bank (MNB) introduced an 18% interest rate on its overnight deposits. Commercial banks took advantage of this scheme by making deposits at the MNB, offering high interest rates to their own clients (anywhere between 9% and 18%), and realizing a profit on the difference, which must be paid by the Treasury.
Interest rate caps to redirect investment
In order to stop this, an interest rate cap was introduced at the end of November. In line with this, Hungarian commercial banks cannot offer their clients who make major deposits interest rates higher than the quarterly rates of the Discount Treasury Bonds (diszkont kincstárjegy, DKJ), which is currently around 13%. In this sense, “major investment” means at least HUF 20 million (ca. EUR 50,000).
Since anyone investing a sum above HUF 20 million in Hungary cannot expect an interest rate above that of the DKJ, this measure is actually an incentive for investors to put their money in government bonds instead of trusting it to commercial banks.
The rule is supposed to stay in effect until 31 March 2023.
Mismatch between MNB and Treasury rates
The need for the newly introduced measure arose because of the mismatch between the MNB benchmark interest rate and the interest rates of government bonds available at the Treasury. Since the increase to the MNB benchmark was relatively steep, government bonds have not yet had time enough to follow them. Currently, the highest available rate at the Treasury is around 16.5% with a variable interest rate for bonds that mature in 3-5 years, which is still lower than the 18% available from the overnight deposit with the MNB.
While the high MNB benchmark rate is essential for mitigating inflation, it is diverting investors from government bonds.
The new measures do not counter the effects of the high benchmark rate
The interest rate cap affects only domestic investors. In the international market, between banks and other financial institutions, no restrictions can be imposed on trade. Since HUF is mostly traded by foreign entities, the positive effects of the high benchmark rate hold.
While the interest rate cap is in effect until 31 March 2023, experts do not expect the considerable difference between the MNB and the Treasury rates to be maintained in the long term either. The 18% on overnight deposits is widely considered an emergency measure that should be gradually decreased over the following year.
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