October 16, 2018 / 12:07 PM / a month ago

UPDATE 2-Hungarian central bank keeps rates on hold, despite rising inflation

(Adds central bank comments, updates forint)

* Base rate, overnight deposit rate remain at record lows

* Sept inflation rose to highest since January 2013

* Bank says it is prepared for future policy normalisation

* Some market players question sustainability of loose policy

By Gergely Szakacs and Krisztina Than

BUDAPEST, Oct 16 (Reuters) - Hungary’s central bank (NBH) kept its key interest rates on hold at record lows on Tuesday in the face of market concerns about rising inflation and reiterated it was prepared for a future normalisation of its policy.

Central Europe’s most dovish central bank left its base rate at 0.9 percent and its overnight deposit rate at -0.15 percent , both in line with the median forecasts of analysts in a Reuters poll.

“The Council is prepared for the gradual and cautious normalisation of monetary policy, which will start depending on the outlook for inflation,” the Monetary Council said in its statement after the rate decision, reiterating its September message.

“The inflation target is still expected to be achieved in a sustainable manner from mid-2019. To ensure this ... maintaining the current level of the base rate and the loose monetary conditions is necessary,” it said.

At 1315 GMT, the forint traded at 321.75 versus the euro, a touch firmer than 321.83 before the announcement.

The bank has stuck to its dovish stance even as some other central banks in Central Europe started raising interest rates.

It revamped its policy tools in September to prepare for a gradual policy normalisation but stopping short of saying when this could start.

Headline inflation picked up to 3.6 percent in September from 3.4 percent in August, the highest rate since January 2013, but still within the NBH’s 2 to 4 percent target range.

Although the September inflation figures were within the target range, the NBH also needs to watch central bankers in the United States, the euro zone and the region.

In its statement the NBH said inflationary pressures from wages remained moderate and inflation expectations were anchored at a low level.

The bank said inflation would stay above 3 percent for now because an increase in excise taxes would add upward pressure on inflation, in addition to fuel and unprocessed food prices.

“As temporary effects fade, the inflation rate is expected to ease back again, and the rise in underlying inflation will ensure that inflation meets the 3 percent target in a sustainable structure from mid-2019,” it added.

A rise in interest rates elsewhere can weaken the forint if Hungarian interest rates stay low, which can generate additional inflation and more forint weakness, some analysts said.

Some analysts expect the base rate to start to rise from 0.9 percent next year, but their median forecasts show an unchanged rate for the end of 2019, before a rise to 1.5 percent in 2020 . (Reporting by Gergely Szakacs; editing by Andrew Heavens, Larry King)

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