Hungary minister expects decision next week about new reference rate By Reuters

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© Reuters. Hungarian Finance Minister Mihaly Varga speaks during an interview with Reuters in Budapest, Hungary July 19, 2023. REUTERS/Krisztina Than/File Photo

BUDAPEST (Reuters) – Hungary will decide in coming days on whether to proceed with a technical change in the calculation of loan repayment rates, intended to cut the cost of borrowing and boost the economy but which drew criticism from the Bank of Hungary.

In an interview published on Sunday, Finance Minister Mihaly Varga told private news site that the government will decide next week on its proposal to replace interbank rates with Treasury bill yields as the new, much lower benchmark for corporate and retail loans.

The move is part of Prime Minister Viktor Orban’s efforts to revive Hungary’s economy, but its central bank on Thursday criticised it as “misguided”, saying it would reduce the scope for policy manoeuvre.

In the interview Varga was quoted saying: “I am confident that by next week we will have a decision that is good for the financial institutions and good for the government as well.”

“(The proposal)is a perfectly legitimate point,” he said on the sidelines of a conference which took place on Saturday. “However, the market reaction has shown that the market has not quite understood the purpose of the initiative.”

A surge in inflation last year to 25%, the highest in the European Union, pushed Hungary’s economy into recession, and while growth is expected to resume in 2024, a Reuters poll this week suggested it would miss the government’s 3.6% forecast.

S&P Global financial institutions analyst Lukas Freund told Reuters earlier this week the proposal represented another example of Budapest’s unconventional policy, which aimed to boost the economy but posed a risk to the financial sector.

The government responded last week to the central bank criticism by saying the bank had mishandled the root cause of the problem after the spread between the Budapest Interbank Offered Rate (BUBOR) and Treasury bill yields widened to around 250 basis points.

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