BUDAPEST, April 4 Hungary's new central bank chief launched measures to boost lending and tackle companies' foreign currency debt on Thursday, embarking on a new path to support the government's pro-growth agenda.
Newly appointed central bank Governor Gyorgy Matolcsy unveiled a 250 billion forint ($1.06 billion) scheme aimed at small and medium sized companies that he said was based on the Bank of England's Funding for Lending programme.
"Hungary needs a turnaround in economic growth," Matolcsy told a news conference, adding that the bank's mandate allowed it to support government economic policy if it meets its goals of price and financial stability.
He also said the central bank would use 3 billion euros of its reserves to help relieve small and medium-sized firms struggling to pay off debts denominated in euros and Swiss francs that have become more expensive due to the weaker forint.
The announcements confirmed months of market speculation that Matolcsy, a close ally of Prime Minister Viktor Orban, would extend into the bank a campaign of pro-growth policies he created as economy minister.
His pledges to use the bank to further Orban's economic policies - which eschew traditional austerity measures espoused by the European Union and International Monetary Fund in favour of taxing foreign companies, seizing private pension funds, and other measures - have kept markets on edge.
Investors have been concerned about the bank's independence under Matolcsy. Orban, who has been accused by the European Union and United States of weakening Hungary's young democracy. In the few weeks he has been in charge at the bank, Matolcsy has dismissed several of its most respected economists.
Thursday's announcements did not go as far as some analysts had expected, but they knocked the forint currency more than half a percent lower versus the euro before a rebound to stronger levels at 301.
Matolcsy said the central bank would extend credit to commercial lenders for free so they would give loans to firms at a maximum 2 percent, far lower than the bank's official lending rate of 5 percent.
He said the bank, after talks with commercial banks and the government, would also reduce the amount of 2-week bills the bank issues to partly offset the new flow of cash, a measure analysts said could push the forint weaker.
The forint has lost about 4 percent this year, more than any other currency in emerging Europe.
"The announcement on the whole is not the worst we could have expected. The riskiest move at first glance seems to be the limiting of two-week deposits, which could have a direct forint weakening effect, but the extent of that could have been worse, too," said Zoltan Arokszallasi at Erste Bank.
"In short, there are risks but we need to see the details. If those details are not extreme, the overall effect may be limited on the market."
Despite the forint's weakness, investors have continued to buy Hungarian debt, and government yields fell on Thursday by around 40 basis points across the curve in government bond tenders.