Hungary Extends Interest Rate Freeze on Loans, Keeps Special Bank Levy in Place

The interest rate cap on loans will remain in place until the key interest rate falls below 10%, and extra profit taxes may remain at least partially next year. The interest rate decision may cost the banking sector at least HUF 70 billion, and the special tax may cost the banking sector even more than 200 billion next year.

Hungary’s government announced the freeze on interest rates for retail loans in November 2022 and expanded the scope of the measure to include loans to small- and medium-size enterprises (SMEs) in November of the same year. The cap was scheduled to expire on June 30, but the government decided to extend it, Gergely Gulyás, minister in charge of the Prime Minister’s Office said at a press conference this week. He emphasized that the level of inflation and, consequently, the level of the central bank interest rate, make it impossible for the government to change the interest rate cap. The cap will be abolished once the key interest rate, currently at 18%, falls below 10%. The extension directly helps 300,000 Hungarian households with over HUF 1.4 trillion in loans, Gulyás said.
Although the extension of the interest rate freeze is indeed good news for customers with mortgages and other loans, it is almost certain that repayment installments will rise significantly when the government actually phases out the measure, as the phase out will not be implemented at the interest level at which it was introduced.

Criticized measure
In the current interest rate environment, the interest rate freeze costs banks about HUF 200 billion in one year. At the time of its introduction, the National Bank of Hungary criticized the measure, saying it weakens monetary transmission, causes a direct loss at banks, it has a negative effect on the domestic financial culture and increases the moral hazard. In its current form, the freeze provides unjustifiably many advantages to those who have taken out higher-risk, variable-rate mortgage loans, the monetary authority said in November.
Given that the inflation rate is still around 24%, there is little chance that the central bank will be able to engage in aggressive monetary easing any time soon. Even though the government expects inflation to reach single-digit territory by the end of the year, the key interest rate is unlikely to fall below 10% this year. Market expectations based on forward rate agreements show that the base rate will still be around 11% in February 2024.
Financial news website Portfolio.hu estimates that in its current form, the extension of the interest rate cap will cost the Hungarian banking sector HUF70 billion this year.

Extra tax: a broken promise
Last year, banks paid HUF 226 billion in extra profit tax, according to central bank data. Minister Gulyás announced at the press conference that the method of calculation for the tax has been changed by the government but the levy will remain in place. According to the government's promise and current legislation, the tax was to be in place for two years only: 2022 and 2023, and it would be scrapped at the end of this year. Based on what the minister said, the extra profit tax will only partially disappear next year, and it will not decrease in all sectors. As a result, the banking sector may have to pay a burden similar to this year's level in 2024 as well. The minister failed to clarify whether the levy will remain in place unchanged or whether it will be reduced.