Hungary lending boom may be nearing end, further slowdown on the horizon

Activity on Hungary’s credit market showed a general slowdown in October, even though bank lending rates only started to rise sharply in November. Given the rather aggressive monetary tightening pursued by the National Bank of Hungary, the coming months could bring an even more accentuated slowdown in lending.

Activity on the Hungarian retail credit market slowed down in October compared to previous months even though the National Bank of Hungary (MNB) launched its Green Home Program in early October. Under the initiative, the MNB provides loans of up to HUF 70 million for new housing with an interest rate of maximum 2.5%. Analysts believe that the slowdown is primarily attributable to the seasonality of the credit market and the impact of the central bank’s rate hike cycle has yet to show up in lending numbers.

Central bank hikes again
Hungary’s central bank raised the borrowing costs for the fifth time in less than three weeks as policy makers seek to curb inflation and help the forint. The central bank raised its one-week deposit rate by 20 basis points to 3.1% earlier this week, bringing the total tightening to a combined 130 basis points. The forint, which weakened to a record level against the euro in late November, profited from the rate hikes and strengthened to a three-week high of 361 per euro after the central bank announced its latest rate hike. Last month, the bank raised its main base rate by 30 basis points to 2.1% and pledged to continue its monetary tightening as long as necessary. Policy makers projected a "more extensive and longer lasting" tightening cycle to anchor inflationary expectations. In addition, National Bank of Hungary Governor György Matolcsy said the bank will gradually stop its quantitative easing program as higher interest rates were insufficient to temper higher-than-expected inflation. The central bank will hold its next rate-setting meeting on Dec. 14 and the market unanimously expects the bank to continue tightening monetary conditions as inflation is set to overshoot the bank’s target even in 2022.

More expensive loans
The continued rise in interest rates will make loans more expensive, which in turn is expected to bring about further slowdown in credit market activity. Most local banks have already started adjusting the price of their loans to the monetary policy course, which means they started to raise the cost of their loans.
Following in the footsteps of UniCredit Bank Hungary and Gránit Bank, Hungary’s largest lender OTP Bank has also modified its lending conditions effective from December. The change primarily affects retail mortgage loans, where interest rates are increasing to varying degrees, depending on the maturity and the amount of the loan in question. Interest rates on forint-denominated housing loans with a 5-year interest period will increase by 0.7 percentage points. Depending on the size of the loan, this can result in an effective interest rate of 5.95-7.35%. Interest rates on forint-denominated housing loans with a fixed interest rate throughout the entire maturity of the loan will increase by 0.4 percentage points. This means that depending on the size of the loan, the bank can charge an effective interest rate of 6.75-8.1%.

Capital buffer
Earlier this week, the MNB issued new capital buffer requirements for the country's seven "systemically important" banking groups. The monetary authority prescribed a capital buffer rate for OTP Bank, Hungary's biggest commercial bank, of 0.5% for 2022. That rate is set to rise to 1% in 2023 and 2% in 2024. The MNB has required systemically important institutions, banks that are likely to create risks to financial stability due to the central role they play in the financial intermediation system, to adopt systemic risk buffers since 2017.