Opinion of the European Central Bank of 26 April 2023 on the restriction of the negotiability of discount bills issued by the Magyar Nemzeti Bank and the extension of an interest rate cap (CON/2023/10)

OPINION OF THE EUROPEAN CENTRAL BANK of 26 April 2023 on the restriction of the negotiability of discount bills issued by the Magyar Nemzeti Bank and the extension of an interest rate cap (CON/2023/10) Introduction and legal basis

On 22 March 2023, a Hungarian Government Decree 89/2023 (III. 22.) on economic and financial measures (hereinafter the ‘decree’) was published in the Hungarian Official Gazette. The European Central Bank (ECB) has not been consulted by the Hungarian authorities on the decree. The ECB has decided to deliver an own initiative opinion on the decree. The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC , as the decree relates to the Magyar Nemzeti Bank (MNB). In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the decree

1.1 The decree provides that certain institutions falling under specified provisions of the Law on the Magyar Nemzeti Bank (hereinafter the ‘Law on the MNB’) may not purchase, until 30 June 2023, a Hungarian forint-denominated debt instrument issued by the central bank of a Member State of the Union. The institutions covered by this prohibition are voluntary mutual insurance funds, home savings and loan associations, private pensions and private pension funds, insurance institutions, entities regulated by the Acts on investment firms, commodity dealers, collective investment firms and their managers. The same prohibition applies to natural persons if their investment exceeds HUF 20,000,000. 1.2 The decree extends from 31 March 2023 to 30 June 2023 the existing requirement under Decree 471/2022 (XI. 21.) on certain economic measures , which stipulates that in the case of the same persons and entities covered by the decree, the interest paid on demand deposits with a maximum maturity of one year under deposit agreements concluded with a credit institution may not exceed

A Kormány 89/2023. (III. 22.) Korm. rendelete gazdasági, finanszírozási tárgyú intézkedésekről, közzétéve a Magyar Közlöny 2023/41. számában.

2 Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42).

4 A Kormány 471/2022. (XI. 21.) Korm. rendelete egyes gazdasági tárgyú intézkedésekről, közzétéve a Magyar Közlöny 2022/190. számában. the average yield of the last auction of the discount Treasury bill issued by the Hungarian State with a remaining maturity of three months, as published on the official website of the Államadósság Kezelő Központ (Hungarian Government Debt Management Agency) (hereinafter the ‘interest rate cap’). 1.3 The decree entered into force on 23 March 2023.

2. Background

2.1 Following the Russian Federation’s invasion of Ukraine, pre-existing inflationary pressures were compounded by further rising energy prices, leading to consumer price inflation based on the Harmonised Index of Consumer Prices (HICP) to exceed 25 % in February 2023, which is the highest level in the Union . Against rising inflationary pressures, the MNB increased its base rate from 0.6 % in June 2021 to 13.0 % in September 2022 . In October 2022, the MNB announced one-day deposit quick tenders on a daily basis at an interest rate of 18.0 % . 2.2 In December 2021 the MNB introduced a discount bill programme, primarily, the ECB understands, for the purposes of implementing the MNB’s monetary policy . The programme was based on the applicable provisions of the Law on the MNB, which state that the MNB shall define and implement monetary policy, and that, as an instrument of its monetary policy, the MNB can issue securities . The discount bills issued by the MNB were available for purchase by (1) credit institutions having a registered office in Hungary, (2) foreign credit institutions having a registered office in the European Economic Area (EEA) and with a branch office in Hungary that act through their branch office in Hungary, and (3) Hungarian branch offices of foreign credit institutions having a registered office outside the EEA. The bills were freely negotiable . 2.3 The ECB understands that in the autumn of 2022, the Government noted that high interest rates were being earned on deposits made by certain investors pursuant to agreements with their credit institutions under which those investors deposited amounts with those credit institutions which, in turn, deposited them with the MNB. This enabled those investors to earn a higher level of interest than that earned on debt securities issued by the Government. With the intention of preventing this, the Government adopted the interest rate cap. The Minister for Economic Development announced that the interest rate cap was necessary to ensure the smooth functioning of the lending and distribution of government bonds and the channelling of resources into the economy by guaranteeing that the interest paid by the MNB on deposits will not be available to investors . 2.4 In 2021 and 2022, the discount bills issued by the MNB were issued infrequently. Following the introduction of the interest rate cap, the MNB significantly amended its discount bill programme, by announcing regular weekly tenders. The ECB understands that this facilitated credit institutions to

5 See ‘HICP Overall Index’ available on the ECB Statistical Warehouse website at https://sdw.ecb.europa.eu.

6 See ‘Central bank base rate history’ available on the MNB’s website at www.mnb.hu.

7 See ‘Deposit Quick Tender’ available on the MNB’s website.

8 See ‘Information Sheet for the issuance of the Discount bill of the Magyar Nemzeti Bank’, p.1, available on the MNB’s website.

10 See ’Information Sheet for the issuance of the Discount bill of the Magyar Nemzeti Bank’, p. 3, available on the MNB’s website.

11 See Minister for Economic Development, press release: ‘No more profiteering’, available at www.kormany.hu. directly purchase discount bills from the MNB and sell these bills to institutional investors to whom the interest rate cap applies. Following the amendments to the MNB discount bill programme, the amounts allotted under the programme increased significantly. . The ECB understands that the increased reliance on the discount bills programme was intended, inter alia, to address obvious impairments in the monetary policy transmission mechanism that had been created by interest rate caps on demand deposits imposed by Decree 471/2022 (XI. 21.).

3. Observations

3.1 Article 130 of the Treaty provides that when exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the European System of Central Banks and of the European Central Bank (the ‘Statute of the ESCB’), neither a national central bank (NCB), including the MNB, nor any member of its decision-making bodies, shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body; the Union institutions, bodies, offices or agencies, and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the NCBs in the performance of their tasks . 3.2 Article 130 of the Treaty also applies to Member States with a derogation, meaning Member States in respect of which the Council has not yet decided that they fulfil the necessary conditions for the adoption of the euro, like Hungary. This provision is not referred to by Article 139(2) of the Treaty, which lists the provisions of the Treaties that do not apply to such Member States with a derogation. In contrast, Article 139(2) of the Treaty in conjunction with Article 42.2 of the Statute of the ESCB clarifies that the central banks of Member States with a derogation, including the MNB, shall retain their powers in the field of monetary policy according to national law. Consistent with these Treaty requirements, the independence of the MNB, and the concomitant primary objective of the MNB to maintain price stability, are enshrined in Hungarian law . 3.3 Central bank independence is served by providing the NCBs with the necessary means and instruments to conduct an efficient monetary policy and to achieve the price stability objective independently of any other authority, reflecting the generally held view that the primary objective of price stability is best served by a fully independent institution . 3.4 The ECB understands that the MNB’s discount bill programme is a monetary policy instrument introduced by the MNB as part of the overall definition and implementation of the MNB’s monetary policy. However, the decree, in addition to extending the interest rate cap until 30 June 2023, prohibits certain institutions from purchasing, until 30 June 2023, a Hungarian forint-denominated debt instrument issued by the central bank of a Member State. Hence, the decree, including the

12 In the weekly issuances starting on 1 February 2023, the MNB allotted HUF 9,311.029 billion. On 1 February 2023 HUF 864.507 billion was allotted, on 8 February 2023 HUF 958.169 billion was allotted, on 15 February 2023 HUF 906.026 billion, on 22 February 2023 HUF 1,392.866 billion, on 1 March 2023 HUF 1,190.869 billion, on 8 March 2023 HUF 1,150.130 billion, on 14 March 2023 HUF 1,389.773 billion, on 21 March 2023 HUF 382.997 billion, and on 22 March 2023 HUF 1,075.692. See ‘Discount bill auction results’, available on the MNB’s website.

13 Article 130 of the Treaty is reiterated by Article 7 of the Statute.

15 See Convergence Report, June 2022, p. 20. interest rate cap, interferes with the independence of the MNB, since it impedes the MNB from independently choosing the necessary means and instruments to conduct an efficient monetary policy and to independently achieve the price stability objective. 3.5 Therefore, the decree infringes the independence of the MNB under Article 130 of the Treaty. This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 26 April 2023. [signed] The President of the ECB Christine LAGARDE