Hungary eyes Treasury bills to cut corporate borrowing costs

Hungary economy: Hungarian officials unveiled a proposal on Monday to use Treasury bill yields as the benchmark lending rate for corporate loans, a strategic move aimed at reducing borrowing costs and supporting Prime Minister Viktor Orban's economic recovery initiatives.

A sharp increase in inflation last year, reaching 25 per cent, the highest in the European Union, led Hungary into a recession. Despite expectations of economic growth in 2024, a recent Reuters poll indicated a potential shortfall against the government's forecast of 3.6 per cent.

Impending elections 

As Hungary gears up for the European Parliament and local elections this year, Orban's government has been urging the central bank to take more decisive actions to aid economic recovery. Officials from the Economy Ministry emphasised in a study published on the financial news website portfolio.hu that while several measures have been implemented to address lending declines, they remain insufficient for fostering growth.

The proposal advocates using Treasury bill yields as the benchmark for variable-rate corporate loans, asserting that this approach, compared to the current practice tied to money market rates, better aligns with supply and demand dynamics and market expectations. The central bank's benchmark rate, presently at 10.75 per cent, has seen a cumulative reduction of 725 basis points since May.

New benchmarks 

Advocates of the proposal argue that adopting a new benchmark could stimulate economic growth and encourage investments. On Monday, the three-month Budapest Interbank Offered Rate (BUBOR) stood at 9.53 per cent, while Hungary sold three-month Treasury bills with an average yield of 6.92 per cent the previous week.

The central bank has not yet responded to the proposal. In November, it acknowledged "remarkably high" profitability in the banking sector, citing interest income on central bank deposits as a significant contributing factor.

(with Reuters inputs)