March 24, 2020 / 2:51 PM / 5 days ago

UPDATE 3-Hungarian central bank holds rates, acts to boost liquidity

(Updates with comments from Deputy Governor Nagy, market reaction)

* Base rate stays at 0.9%, overnight depo rate -0.05%

* Decision in line with analysts’ forecasts

* Bank launches new liquidity measures

* Bank sees inflation dropping sharply

* Need to prevent damage to potential GDP -Nagy

* Forint eases over 1% on day, near record lows

By Krisztina Than and Gergely Szakacs

BUDAPEST, March 24 (Reuters) - Hungary’s central bank launched new measures to boost liquidity on Tuesday and flagged further steps if needed to prevent long-term damage to the economy from the coronavirus pandemic.

The Monetary Council left interest rates on hold, as expected, and moved to pump more money into the banking system by introducing a massive fixed-rate collateralised loan instrument. Lending will be provided to banks at a fixed interest rate in unlimited quantity, to support bank lending and also government bond purchases.

“To address the challenges posed by the pandemic, it is key to ensure the required level of liquidity. In order to preserve effective monetary policy transmission, the Monetary Council is ready to take further measures to provide additional liquidity,” the rate-setting panel said in a statement.

The first tender of the new instrument, the latest in a string of measures to boost liquidity, will be held on Wednesday.

The National Bank of Hungary, which runs the lowest rates in central Europe, also released domestic lenders from the requirement to hold a certain level of cash as reserves with immediate effect.

Deputy Governor Marton Nagy told an online press briefing that the main focus was on underpinning the economy as inflation was seen stabilising at the bank’s 3% target by the end of 2020.

“We will need to give a helping hand to several companies to preserve the mainstays of the economy who can maintain potential GDP growth over the long run,” Nagy said.

“The base scenario is a V-shaped recovery, for which we need to do a lot (to make it happen) .... and it is surrounded by very big uncertainty,” he said.

Nagy added that if the crisis lasts until the end of the summer, or even the autumn, GDP growth could be much lower than the bank’s latest 2% to 3% forecast and in that case a U-shaped recovery could become more likely.

At 1605 GMT, the forint traded at 354.9 versus the euro, off its session-lows but still about 1% weaker on the day and within sight of its all-time lows near the 360-mark hit earlier this month.

Nagy reiterated that the bank had no exchange rate target and said despite its falls the forint has been the least volatile unit in central Europe as central banks from Warsaw to Prague and Bucharest cut rates to counter the effects of the virus.

The Hungarian central bank expects inflation to slow to 2.6-2.8% this year, below its previous forecast. It said the economy would slow in the first half of this year but then rebound later. (Reporting by Krisztina Than; Editing by Larry King, William Maclean and Alex Richardson)

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