Hungary Special | Two-tier interest rate system
The specifics of Hungarian monetary policy should not be seen solely through the lens of the central bank, but also take into account the government’s perspective. The ultra-dovish monetary policy is partially being counterbalanced by the government’s offer of retail bonds with considerably higher interest payments compared to the yields available on the wholesale government bond market. In other words, the government effectively delivered tightening, fostering an increase in the saving rate and dampening the inflation outlook and real estate price growth, although the original aim – increasing the domestic holdings of public debt - lied elsewhere.
The strategy incentivizing locals to buy government debt proved to be successful. In the low interest rate environment, individual investors and households rushed to move their savings from deposits to high-yield retail bonds, which recently got a major boost by the introduction of the 5Y 'super' paper.
Such a 'policy-mix' seems unique not just on a regional level, but even on a global level, and we dare to call it a 'two-tier system'. While such a system seems like a 'win-win' situation, it carries underlying long-term risks and challenges as well. The system requires a much more active management of the liquidity situation from the central bank and debt management agency. The challenges raise the question as to how long the huge difference in favor of retail securities can be maintained, or how long the sales of retail government paper can remain unconstrained. Overall, however, the benefits currently seem to outweigh these considerations for Hungarian authorities, while at the moment, global interest rate and inflation expectations are also low.