By Krisztina Than
BUDAPEST, April 18 (Reuters) - Hungary's central bank should stop the 'wrong practice' of allowing foreign investors to take part in tenders for its two-week bills, bank Governor Gyorgy Matolcsy told national news agency MTI on Thursday.
The comments followed market speculation that Matolcsy had more surprise steps up his sleeve after a set of new measures announced earlier this month to kickstart lending as the bank wants to support the populist government's pro-growth policies.
Matolcsy is a close ally of Prime Minister Viktor Orban.
A government MP immediately welcomed the plans to restrict access to the 2-week bills, saying this would curb the central bank's losses, which need to be covered from the state budget.
The volatile forint eased to 297.20 forint per euro by 0824 GMT from around 294.60 before. Market participants and fund managers immediately expressed alarm on Twitter, with one calling it 'another reason to pull out' of Hungary.
Matolcsy told MTI he agreed with the idea raised by the head of the country's bank association that the 2-week facility should be transformed into 2-week deposits again, which would mean in practice that only domestic credit institutions could place funds with the central bank.
'Those who benefit from the high yields and complete security of the Hungarian central bank's two-week bill programme should agree to lend in Hungary and participate in preserving jobs in the Hungarian economy,' Matolcsy was cited as saying in an interview.
Matolcsy said he would propose to the Monetary Council that it should change the 'wrong practice' which allowed foreign investors to take part in the 2-week bill tenders.
He also said the renewal of Hungarian monetary policy started five weeks ago, but it was only the beginning.
The bank has already said it wanted to see a decrease in the
stock of 2-week bills, its main tool to drain liquidity from interbank markets, on which it pays an interest rate of 5 percent now.
The total amount of funds placed in the bills is 4.56 trillion forints ($20.22 billion) now and the bank has said this should go down to around 3.6 trillion.
Analysts said the details of the plans would be crucial, but the measure would be negative for the forint currency.
'There will be some kind of limitation on the facility, but it won't mean that any of the major players will be held back in any major way from using the facility,' Erste Bank analyst Zoltan Arokszallasi said, adding he expected no market meltdown.
Arokszallasi said the stock of two-week bills held by foreigners has been very volatile from month to month, often changing rapidly between 600 billion forints and less than 100 billion forints.
'This cash can go elsewhere in Hungary, like in short-end government bills, but a part of it could well leave the country. It's not the amount that is important here but the option no longer being there for everyone to use the facility,' he added.
($1 = 225.5636 Hungarian forints)
(Additional reporting by Luke Baker in Brussels and Marton Dunai; editing by Stephen Nisbet) Keywords: HUNGARY CENTRALBANK/MATOLCSY
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