May 24, 2016 / 12:11 PM / 2 years ago

UPDATE 2-Hungary cuts interest rate to new low, signals end to easing cycle

BUDAPEST, May 24 (Reuters) - The National Bank of Hungary signalled an end to its monetary easing campaign on Tuesday after cutting its base rate to 0.9 percent, saying current rate levels would support the economy and ensure it meets its inflation goal.

The bank, run by a close ally of Prime Minister Viktor Orban, has cut its base rate in 15 basis-point monthly steps since it started easing again in March to bolster the economy and revive inflation.

Many market players expected the bank to finish its easing cycle on Tuesday after it suggested last month that there was little room for further cuts. Its deputy governor, Marton Nagy, also tried to cool expectations for more rate reductions.

“With the current 15 basis point reduction the policy rate has reached the level of 0.9 percent which ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy,” the rate-setting Monetary Council said in a statement.

“Based on available information, the inflation outlook and the cyclical position of the real economy point to maintaining the 0.9 percent base rate for an extended period,” it added.

In a May 17-18 Reuters poll, 19 out of 20 analysts projected a 15 basis-point cut for Tuesday and one analyst forecast a 10 basis-point reduction.

The forint firmed to 315.66 to the euro from 316 before the rate decision, while yields rose 3-4 basis points.

The bank also cut the overnight lending rate by 15 basis points to 1.15 percent but kept its overnight deposit rate at -0.05 percent, narrowing the corridor between its highest and lowest rates.

The bank has now slashed the base rate from a peak of 7 percent in 2012, supported Orban’s economic policies with a massive programme to boost lending to companies and cut the state’s borrowing costs by forcing local banks to buy more government debt.

CIB Bank analysts said the bank’s statement sent a clear message that it had now effectively ended its easing cycle.

“In the coming months the benchmark rate could remain at 0.9 percent, but if needed, the bank may fine-tune its (monetary policy) toolkit and/or take unconventional measures,” CIB Bank said in a note.

The bank said recent wage data suggested that “the risk of second-round effects resulting from an excessively low level of inflation expectations has diminished.”

Headline inflation returned to positive territory in April, coming in at 0.2 percent year-on-year after -0.2 in March.

The bank said inflation would approach its target of around 3 percent only in the first half of 2018. (Reporting by Krisztina Than; Editing by Hugh Lawson)

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