Turnaround in monetary policy, unconventional instruments available to the central bank
Our banking system, i.e. the central bank and commercial banks saw substantial changes in the course of the economic crisis that emerged in 2008 and the political turnaround that followed the parliamentary elections in 2010. These two influences resulted in the adoption of Act CXXXIX of 2013 on the Magyar Nemzeti Bank still in force and effect, this act abolished the Hungarian Financial Supervisory Authority (PSZÁF), which had been operating independently until then, and assigned its functions and duties to the Central Bank.
Integration was a fundamental step towards controlling system-level risks that threaten the stability of the entire financial system, as it assigned the supervision of the entire financial system (macro level) and individual financial institutions (micro level) to a single organisation.
However, after 2010 not only the organisation of the MNB was reformed, but the monetary toolkit of the central bank has also been changed and modernised. While the toolkit of the central bank before the crisis was primarily the governing interest rate, after the crisis, especially as of 2014 the MNB’s toolbox has been extended to include more so-called unconventional instruments. Traditional solutions were no longer sufficient to overcome the recession caused by the crisis, as 0 % is a strong limit for reducing interest rates, and the same applies to the minimum reserves requirement. Therefore, Magyar Nemzeti Bank launched the Funding for Growth Scheme to achieve the desired level of liquidity and boost the economy to promote the investments of SMEs, allowed commercial banks to obtain central bank loans against liquid securities, and also introduced conditional central bank interest rate swap tenders to help commercial banks manage interest rate risk.
Furthermore, MNB still had a chance to use interest rates to intervene in the economy. While the central (base rate) between the interest rate charged by the central bank on loans and the interest rate on central bank deposits was usually exactly in the middle in the previous decade, this was becoming less the case after 2014, with often asymmetric interest rate limits. Its extent and direction depended on whether the central bank intended to make more favourable or stricter decisions.
In the central banks of developed economies, unconventional instruments also expressly included the acquisition of assets (procurement of different securities), in order to fuel extra money to the recession-ridden economy. Since the financial markets of emerging countries were not adequately prepared for this, their central banks failed to utilise this tool or only to a limited extent. However, Act CCXXVII of 2013 on Credit Institutions and Financial Enterprises established the legal environment that allowed the MNB to actually apply this.
The crisis of 2008 revealed our vulnerability to external circumstances caused by foreign currency debts, as well as the exposure of our small and open economy to exports and imports. This was supported by the MNB’s Self-Financing Programme and the maintenance of an optimal level of foreign exchange reserve. The central bank considers the Greenspan-Guidotti rule as a rule of thumb, which states that besides other criteria, foreign currency reserves should cover the country’s foreign debt that matures within a year.
In addition to the foreign exchange reserves, the repatriation and domestic storage of gold reserves, and their increase in two steps from 3.1 tonnes to 94.5 tonnes in 2018 and 2021, has also reduced external vulnerability and increased confidence in our country.