Banks to pay as Hungary extends scheme to cap loan rates By Reuters

© Reuters. FILE PHOTO: Marton Nagy , when National Bank of Hungary Deputy Governor, attends an interview with Reuters in Budapest, Hungary, May 23, 2017. REUTERS/Krisztina Than

By Krisztina Than

BUDAPEST (Reuters) -Hungary will include variable-rate loans to small- and medium-sized businesses in a scheme designed to cap loan rates and avoid a recession, Minister for Economic Development Marton Nagy said, adding banks could “easily” bear the cost of the measure.

With inflation above 20% and still rising, and the economy slowing, Prime Minister Viktor Orban’s government faces the challenge of curbing price growth while trying to stave off a recession. It has already capped the price of fuel and basic foodstuffs as well as mortgage rates. Energy bills are also capped for most households.

On Saturday, the government announced subsidies worth 150 billion forints ($362 million) for large companies who invest to improve energy efficiency, and expanded its scheme of capped interest rates on loans.

Nagy said rates on business loans will be capped at the 3-month interbank rate of June 28, which was 7.77%, as opposed to the current rate of 16.69%, after an emergency rate hike by the central bank on Oct 14. The cap is effective until July 1, 2023, similar to the existing cap on household mortgage rates.

Banks will pay the cost of the scheme which will total about 80 billion forints to July 1, Nagy said, adding it was a sum they would “easily be able to bear”.

“Rising interest rates bring extra profits for banks,” Nagy added.

When asked if the government held talks with the banks before launching the new cap, he said it had “notified” the Bank Association about the move.

Nagy said the stock of variable-rate loans amounted to close to 2 trillion forints held by about 60,000 small firms, and the measure aimed to avoid these businesses paying 20% or higher rates on their loans.

“We would like to avoid the economy going into recession next year and we have every chance to have 1% growth,” Nagy told a briefing.

“With this loan cap we want to prevent yet another shock to the corporate sector stemming from a surge in their repayments.”

In May, the government announced windfall taxes worth 800 billion forints on what it called “extra profits” earned by banks, energy companies and other firms. These taxes, designed to plug a budget deficit, hit Budapest stocks and rattled investors.

($1 = 413.9900 forints)

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