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Hungary central bank rejects call by lenders to undo reserve policy change

By Gergely Szakacs

BUDAPEST (Reuters) -Hungary's central bank on Friday 'firmly rejected' calls by the country's banks to undo a change in reserve policy, which lenders say will cost them over 100 billion forints ($281.28 million) and could stifle lending.

Hungary's Banking Association called on the central bank on Thursday to row back on a policy change curbing the interest paid on required reserves, just two days after Prime Minister Viktor Orban's top economic aide piled pressure on the bank to start lowering borrowing costs.

The bank, led by Governor Gyorgy Matolcsy, Orban's former economy minister, defied that call, leaving the European Union's highest base rate steady at 13%, as expected, and said it would tighten liquidity conditions further to curb inflation.

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The European Commission forecasts Hungary's average inflation at 16.4% this year, the highest in the European Union.

On Tuesday, the NBH exempted one-fourth of required reserves from bearing interest, while continuing to pay the base rate on the rest of required reserves as part of broader efforts to tighten liquidity conditions.

"Apart from efforts by the government and the central bank, defeating inflation also requires the co-operation of the banking system and companies," the bank said in a statement.

"Wrestling down inflation is in the interest of the entire economy, without which there is no sustainable lending," it said, 'firmly rejecting' the connection made by banks between the new reserve framework and their capacity to lend.

Banks in Hungary say Tuesday's measure would mean they receive 9.75% weighted interest on their required reserves at a time when inflation is running above 25%, which will trigger losses worth over 100 billion forints annually.

However, the central bank, led by Governor Gyorgy Matolcsy, Orban's former economy minister, said financing of the domestic banking system was stable and balanced, with lenders having high liquidity and capital buffers to support lending.

"All measures strengthening monetary transmission and breaking down inflation will be needed until we reach our objectives," the bank said.

($1 = 355.52 forints)

(Reporting by Gergely Szakacs and Alan CharlishEditing by Christina Fincher)