Hungarian lenders bowed to pressure to introduce temporary rate caps on corporate and retail loans after calls by the government to stimulate lending or face an increase in bank levies.

From Monday, banks set a 12% rate for working capital loans for businesses and an 8.5% rate for home loans (new and resale properties) applied to home renovation as well.

"The voluntary rate caps mean extraordinary assistance for tens of thousands of businesses and families, on the one hand, and make a substantial contribution to the start of increased competition among financial institutions, on the other, giving impetus to market-based lending and supporting the economic recovery," Economic Development Minister Marton Nagy said on October 9.

After talks with representatives of the Hungarian Banking Association last week, Nagy asked the country’s lenders to apply voluntary rate caps below the 13% base rate to new corporate and retail credit in order to boost lending to stimulate an economy facing the longest recession since 1995.

The government in exchange offered banks that it would phase out the interest rate cap for businesses if the base rate drops below 10% from 13% at present and review the retail interest rate cap. The government is also backing plans for the financial digitisation of the sector.

The cabinet initially planned to phase out the windfall tax for lenders in 2024, but as the budget gap widened, it scaled back its commitment by one notch and pledged to reduce the tax by half, contingent upon lenders boosting their holdings in government bonds. The government has stepped up a campaign to boost the share of locally issued bonds to plug the deficit.

Finance Minister Mihaly Varga's announcement at the end of September about a possible rise in the bank levy sent shockwaves in the industry. The share price of the country’s leading lender OTP plunged 6% on the news, despite a quick rebuttal by the Fidesz faction and by Marton Nagy a day later. The sequence of events has unveiled tensions within the government on major economic policy issues. T

The increase in the budget deficit target from 3.9% to 5.2% gives the government further wiggle room but according to analysts it still needs to reduce expenditures or boost revenues to meet the new target.

Due to surging borrowing costs, market-based lending has plunged 40-60% in 2023 and only subsidised loans, accounting for roughly half of housing and corporate outlays, are lending support to the credit market.

Home loan APRs averaged 10.12% and the average annualised rate for forint corporate loans, excluding overdrafts, stood at 14.10%, according to data from the Hungarian National Bank (MNB).

Mortgage loans accounted for 42% of new loans disbursed in the last four years. When the general purpose zero-percent prenatal baby loan is included, the share exceeds 50%.