Should we be channelling funds out of NBH two-week bonds?

Gábor Orbán
macroeconomic analyst and bond portfolio manager

“The National Bank of Hungary (NBH) has a massive portfolio of two-week bonds. The funds need to be channelled out of these at long last”, goes the policy proposal I have been hearing from a number of experienced, old hands. By who? Where to? Why?

It is true that the volume of NBH two-week bonds, which serves as a sort of forint-based “sterilised intervention” portfolio in the Hungarian money market, has grown explosively over the recent period. The reason for this is similar to the justification for crawling-peg devaluation way back when: we are witnessing a net influx of capital as the IMF loans are being drawn down at a rate that far exceeds the extent by which other sources of FDI have slowed, essentially as a pre-emptive response to the fact that private capital influx will remain sporadic for a while. The NBH, just as it did 10 years ago, is engaging in a form of sterilised intervention by converting the IMF assistance (foreign currency) into forint, in other words using it to increase reserves, and the forints thus “created” are unavoidably leading to growth in the central bank’s liabilities.

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