(Bloomberg) -- Hungary’s government moved to resolve a dispute with the central bank over the way corporate loan interest rates should be calculated, a spat that had weighed on the country’s currency.

Banks have “voluntarily” agreed to reduce their margins over the interbank reference rate to zero for six months, applicable to new corporate loans taken out between February and April, according to an Economy Ministry statement on Monday, effectively dropping its bid to to replace the reference gauge.

The forint has been the world’s worst-performing currency over the past two weeks, in part due to an escalating standoff between the government and the central bank. The latest clash involved the government’s proposal to use the three-month government bill yield as a new reference rate for loans, in a bid to significantly cut the effective interest rate and kickstart economic growth.

Under the agreement with commercial lenders, the interest rate on new corporate loans will drop by between 2 and 4 percentage points temporarily, the Economy Ministry said. To sweeten the deal, the government in exchange agreed to phase out an interest rate cap on corporate loans for small- and medium-sized companies from April.

The forint pared losses in turbulent trading on Monday after the deal with banks, which coincided with the central bank announcing that it can borrow up to €4 billion ($4.3 billion) from the European Central Bank via a repo line, which has been extended until January 2025. The forint has lost 2.6% against the euro since Jan. 17, when the central bank signaled it may start boosting the size of its rate cuts. 

The currency fell as much as 0.8% against the euro on Monday after the Financial Times reported on an EU paper to exploit Hungary’s economic vulnerabilities, including its currency weakness, if Prime Minister Viktor Orban didn’t agree to lift his veto over the EU’s €50 billion Ukraine aid package, to be discussed at a summit on Thursday. A senior EU official said the paper was merely an internal background document and didn’t represent anything being discussed in the current negotiations.

“The safety net provided by the ECB among others remains available in the current turbulent financial market environment due to heightened geopolitical risks,” the central bank said.

The deals were announced a day before the central bank’s interest rate decision, where policymakers will consider accelerating cuts to the EU’s highest key rate to a full percentage point, from 75 basis points earlier.

©2024 Bloomberg L.P.