The role of MNB bills in domestic financial markets. What is the connection between the large volume of MNB bills, bank lending and demand in the government securities markets?
The two-week MNB bill is a central component of Hungary’s monetary policy instruments; it is a key instrument of the central bank, the interest rate of which is identical to the central bank base rate. By mid-2009, the outstanding amount of MNB bills reached HUF 3,000 billion, which – in addition to representing one third of the central bank’s liabilities – accounts for a significant part of the domestic banking sector’s liquid assets. By using the two-week bill to absorb the excess liquidity of the banking sector, the central bank ensures that developments in banks’ interest rates will be driven by the MNB bill as an opportunity cost. The volume of these liquid assets builds up gradually, regardless of banks’ willingness to lend. Indeed, the growth observed in the holdings of MNB bills helped to relieve the liquidity tensions of credit institutions and contributed to gradually reducing the role of this factor in the decline in lending activity in 2009. Nonetheless, lending remained restrained despite the ample liquidity, which primarily reflects banks’ deteriorating risk appetite. One of the major correlations in the central bank’s balance sheet is the fact that, while credit institutions are free to decide on the volume of two-week MNB bills they purchase at the individual level, they are unable to affect the volume of bills in the overall banking sector. The accelerated growth rate in the volume of two-week bills observed in the previous year resulted from the use of foreign currency loans to finance the general government, which implies that the large volume of two-week bills is a consequence of poor demand in the government securities market, rather than the reason for this. In a regional comparison, however, the relatively high central bank base rate does not affect the volume of the key instrument, as the central bank interest rate has no direct impact on the liquidity of the banking sector.
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