The design and implementation of the MNB’s euro sale programme introduced in relation to early repayments

As a result of the early repayment programme launched in the autumn of 2011, buying demand for several billions of euros arose on the side of domestic banks. The purchase of such amounts in the foreign exchange market would have alone contributed to a substantial weakening of the forint; moreover, it could have led to a speculative attack, further aggravating the depreciation of the currency. The objective of the MNB’s euro sale programme was to use the Bank’s foreign exchange reserves in a prudent manner, under clearly defined terms, to prevent depreciation of the national currency without increasing the country’s vulnerability. Both the situation of domestic banks and the development of the instrument were made difficult to a great extent by the fact that the volume of loans to be repaid and hence the quantity of foreign currency necessary for hedging were uncertain. The Bank therefore needed to define the parameters of the instrument so as to enable credit institutions to continuously buy foreign currency from the Bank, but without encouraging overhedging and to ensure that the price of the instrument is not cheaper than the market rate, but not so high as to discourage banks from using it. The MNB held a total of 22 tenders; it paid out approximately EUR 2.6 billion of the foreign currency sold at the tenders, equalling 60 per cent of the total volume of the early repaid loans.