Hungary Central Bank Statement

Author: | Published: 5 Sep 2017
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In the aftermath of the global financial crisis, central banks took several unconventional steps to stimulate the real economy. These included using their balance sheets more actively than before and in some cases their balance sheets expanded substantially. In the years to come, central bank balance sheets will be of crucial importance, but there is a significant debate about their optimal size and the possible ways and timing of reducing them.

At the time of the global financial crisis, the Hungarian economy was characterised by an unsustainable debt trajectory and weak structural growth. As the central bank of a small, open economy, the Magyar Nemzeti Bank (MNB) needed to find well-designed, targeted monetary policy tools to stimulate growth.

To complement the conventional monetary policy tools, the MNB took unconventional measures that had a direct impact on economic growth. The Funding for Growth Scheme and more recently the Market-Based Lending Scheme have set lending to SMEs on a rising trend. These targeted monetary policy measures have been supported by the active use of the central bank balance sheet. Restructuring, rather than expanding, the central bank balance sheet helped in designing the incentives of the banking system.

At the same time, other policy tools targeting a decrease in the economy's vulnerability also had a positive indirect impact on Hungary's economic growth. The vulnerability stemming from foreign exchange exposure was decreased greatly via the conversion of foreign currency loans into Hungarian forint. Simultaneously, the self-financing programme decreased the currency and the renewal risk of government debt. Overall, these measures contributed to a sustained reduction in vulnerability and restored confidence in Hungarian economic policy, which was also reflected in upgrades of Hungarian debt by international rating agencies. Apart from these achievements, the measures led to a considerable increase in disposable income by decreasing financing costs for each economic sector.

As a result, the MNB has contributed significantly to Hungary's growth rate, returning it to the regional average, which is among the most dynamic in the EU. The MNB achieved all of this not by expanding, but by restructuring the central bank balance sheet. This allows the MNB to influence monetary conditions and manage excess liquidity more efficiently in order to achieve price stability. Uniquely, an accommodative monetary policy environment has been achieved and at the same time the central bank's balance sheet as a percent of GDP decreased by one third in the past four years. This contraction in the central bank balance sheet increases the room for future policy manoeuvre in case it is necessary.

In the new era following the global crisis, it is important to maintain a balanced cooperation of policies, as well as a flexible and innovative approach to promoting sustainable growth. Targeted country and market-specific actions are required to boost economic growth by increasing competitiveness, to decrease vulnerability and to heal impaired post-crisis transmission channels.




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