The Reduction of External Vulnerability and Easing of Monetary Conditions with a Targeted Non-Conventional Programme: The Self-Financing Programme of the Magyar Nemzeti Bank

Abstract

In addition to its primary task of achieving and maintaining price stability, the Magyar Nemzeti Bank (Central Bank of Hungary – MNB) views the reduction of Hungary’s external vulnerability as a key priority. For that reason in the spring of 2014 the central bank introduced the Self-Financing Programme, in the context of which its policy instruments were restructured in order to crowd bank liquidity out of the sterilisation instruments and redirect it to the market of liquid securities. The Programme has met its initial goals as the external vulnerability of Hungary has decreased significantly. Between spring 2014 and December 2016 the Hungarian government repaid EUR 11 billion of its foreign currency debt from forints, the foreign currency ratio of government debt lowered to around 25 per cent from the previous 50 per cent, while gross external debt decreased also significantly. While the primary goal of the Programme was to reduce Hungary’s external vulnerability, the measures were also intended to facilitate the easing of monetary conditions in an unconventional way. The yield-impact of the Self-Financing Programme could be around 75–90 basis points which makes that the Programme supplemented the yield-effect of central bank interest rate cuts with a magnitude of one half of their effect between 2014 and 2016.