BUDAPEST (Reuters) - Hungary’s central bank may continue to use unconventional tools to bear down on borrowing costs while keeping its benchmark base rate at a low level through 2018 and 2019, a deputy governor was quoted on Wednesday as saying in daily Vilaggazdasag.
Instead of cutting its base rate further, the bank has been loosening monetary conditions by boosting liquidity in local money markets, driving interbank rates and borrowing costs lower - a policy Marton Nagy signalled could persist for some time.
“If needed, the Monetary Council could decide on further gradual monetary loosening with cautious steps, using unconventional tools,” Nagy told the Vilaggazdasag daily in an interview.
Any further reduction in the base rate NBHI, which now stands at 0.9 percent, could have “undesirable effects”, he said, adding that unconventional tools could have a more effective targeted impact on financial markets.
Hungary’s central bank kept its base rate on hold earlier this month and instead set a cap on the amount of funds banks can place in its three-month deposit facility in an effort to stimulate lending and drive down borrowing costs.
Nagy said the divergence between rates in the United States, where the Federal Reserve is tightening policy, and the euro zone, where monetary conditions remain loose, gave the Hungarian central bank room to keep its rates at historically low levels.
Nagy said bank lending to small and medium sized businesses in Hungary could rise by 5 to 10 percent next year, while lending to households could also grow.
“We expect growth exceeding one percent in 2017, while in 2018 growth in (household loan stock) could reach 5 percent,” he said, adding that a combination of state-subsidised loan programmes and low interest rates all supported credit growth.
But interest rate spreads charged by banks in Hungary’s housing market are still too wide at around 5 percentage points, he added.
“This must be reduced,” Nagy said, urging price competition between local banks.
Nagy said Hungary’s economy could grow by 3.6 pct next year, adding that he could not exclude the possibility of growth hitting 4 percent. The bank projects growth of 2.8 percent for this year.
Reporting by Krisztina Than; Editing by Gareth Jones