Changes in central bank profit/loss and their determinants

In its monetary policy decision-making, the central bank of Hungary primarily focuses on the achievement of price stability. Without prejudice to this objective, it supports the maintenance of financial stability and the economic policy of the Government. While the low inflation environment resulting from the central bank’s operation and the sound functioning of financial markets and the financial intermediary system can be considered benefits at the society level, direct costs appear in a concentrated form, in the profit/loss of the central bank. The MNB strives to achieve the monetary policy objectives at the lowest possible cost. Therefore, it continuously monitors developments in the factors that determine the central bank profit/loss. The recent significant increase in the MNB’s interest expenditure is primarily attributable to economic developments related to the crisis. Firstly, the state was compelled to borrow foreign exchange, while maintenance of higher-than-earlier foreign exchange reserves became justified due to the external vulnerability of the country. As a result of the two factors, the MNB’s balance sheet total doubled, and a much greater part of the foreign exchange reserves had to be financed from MNB bills than before. Secondly, in view of the deterioration in risk assessment, the forint–foreign exchange interest rate spread, which increased following the crisis, and made the holding of foreign exchange reserves more expensive than earlier. At the same time, the loss of the central bank was reduced by the depreciation of the exchange rate of the forint and the exchange rate gain realised on the foreign exchange sales transactions with the Government Debt Management Agency (AKK) and on the foreign exchange sales related to the early repayment programme. It is also important to emphasise that, in parallel with the strong deterioration in central bank interest income as a result of the foreign exchange financing substituting for the issue of forint-denominated government securities, a considerable amount of interest was saved in the budget, and this saving offset the central bank interest loss to some extent. In our forecast, which is consistent with the September issue of the Quarterly Report on Inflation, we expect that the central bank’s interest loss may be offset by the profit on foreign exchange sales this year again. Consequently, the MNB’s 2013 profit/loss may be close to zero. Over the medium term, with a decline in Hungary’s external indebtedness and a gradual return of the state to forint financing, the central bank’s balance sheet may shrink. At the same time, this process may be decelerated by the Funding for Growth Scheme launched by the MNB, as a result of which, in parallel with an improvement in the SME sector’s access to financing, the balance sheet total of the central bank will increase, ceteris paribus. If the forint policy rate also remains at a low level, the central bank may have a close-to-zero profit/loss in the coming years as well, also taking in account the costs of the economic stimulus programme.