December 15, 2015 / 1:08 PM / 4 years ago

UPDATE 2-Hungary c.bank holds rates, flags more monetary easing with new tools

(Recasts with central bank comments)

* Holds base rate at record low 1.35 pct as expected

* Examining unconventional tools to drive down bond yields

* Expected Fed hike has weakened forint, CEE assets

* Weakening of forint no longer a worry -cbanker

By Krisztina Than

BUDAPEST, Dec 15 (Reuters) - Hungary’s central bank held its benchmark rate at a record low 1.35 percent on Tuesday, as expected, and flagged the possibility of further unconventional easing measures to help the economy.

But the National Bank of Hungary, which is run by a close ally of Prime Minister Viktor Orban and is keen to drive down longer-dated bond yields, stopped short of announcing specific new measures just one day ahead of an expected U.S. rate hike.

“The Monetary Council wishes to achieve the inflation target in a sustainable way by holding the base rate unchanged for an extended period and by using unconventional, targeted monetary policy instruments,” the Council said in a statement.

“The Council examines thoroughly the range of potentially applicable tools.”

The bank lowered its inflation forecast for 2016, but kept its 2.5 economic growth projection unchanged.

The bank has already extended its ‘funding-for-growth’ scheme and launched a new programme to boost bank lending. It has also channelled hundreds of billions of forints into government debt by limiting its two-week deposit facility.

This has driven shorter government debt yields lower but the 10-year yield is still at 3.67 percent, after rising in past days on the expected hike in U.S. borrowing costs, which could diminish investors’ appetite for emerging market assets.

The expectations for a rate hike from the Federal Reserve this week have soured sentiment in emerging markets and weakened Central European assets, even though the region has healthy economic growth rates.

The forint was trading at 315.80 at 1440 GMT, near 5-month lows versus the euro, firming from levels around 317 prior to the rate decision.

“WE DON’T HAVE TO WORRY ANY MORE”

The currency shrugged off comments by Deputy Governor Marton Nagy who said the forint’s recent weakening was not a worry because Hungary’s vulnerability had decreased markedly.

Nagy said in an interview on website vs.hu that the steps of major global central banks had come to affect Hungary to a “much lesser degree”.

Nagy also reiterated that the Hungarian central bank aimed to maintain the base rate at 1.35 percent until the start of 2018.

“A depreciation impact can be already seen in the exchange rate. Two years ago this would have caused serious concern due to households’ and the state’s high degree of foreign currency exposure, but we don’t have to worry any more,” he was quoted as saying.

All analysts polled by Reuters last week had predicted the bank would keep its 1.35 percent rate on hold.

“The NBH will keep monetary conditions accommodative into 1Q16 via the discount IRS (interest rate swap) facility, the FGS (funding for growth scheme) and measures that boost lending,” UniCredit said in a note. (Reporting by Krisztina Than; Editing by Gareth Jones)

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