June 25, 2019 / 12:11 PM / 4 months ago

UPDATE 2-Hungarian central bank sticks to dovish stance despite CPI rise

(Adds central bank comments, CPI forecasts, updates forint)

* Base rate 0.9%, overnight deposit rate -0.05%

* Bank raises its inflation forecasts

* Data coming in second half of 2019 will be key - cbank

* ECB’s dovish turn helps Hungarian bank’s loose policy

By Krisztina Than and Gergely Szakacs

BUDAPEST, June 25 (Reuters) - Hungary’s central bank left interest rates unchanged on Tuesday and kept its dovish stance despite a strong increase in inflation, after the European Central Bank (ECB) flagged further easing earlier this month.

The National Bank of Hungary, Central Europe’s most dovish central bank, said its policy will continue to be accommodative and cautious. Data coming in the second half of 2019 will be decisive in assessing the inflation outlook, it said.

The bank raised its inflation forecasts for 2019-2021.

However, it reiterated that it was watching tax-adjusted core inflation, which excludes volatile elements, and which is expected to reach the bank’s 3 percent target in the middle of 2021.

Deputy Governor Marton Nagy told a news conference that Tuesday’s decision “could be interpreted...as a very slight tightening” as the bank expects Budapest interbank rates to increase slightly in the third quarter as a result of the central bank’s liquidity management.

“We are manoeuvring in a highly volatile environment and it is not warranted to make any sudden moves,” Nagy said. He said changing the overnight deposit rate, which the central bank raised by 10 basis points at its March meeting, would have led to an unjustified increase in the Budapest Interbank Offered Rate (Bubor).

Nagy said the risks to the inflation outlook were “symmetrical” at the moment, and data in the second half of the year will be key to assessing upside and downside inflation risks.

“In light of that, all options could be on the table in the future,” he said.

In its statement, the Monetary Council said the spillover of disinflationary effects of slowing European economic activity, the policies of leading global central banks, and the impacts of Hungary’s counter-cyclical fiscal policy would be decisive for the inflation outlook.

The Hungarian central bank had raised its overnight deposit rate by 10 basis points in March, halting nearly seven years of monetary easing, after inflation rose near the top of its 2% to 4% target range.

It has kept rates on hold since then. The NBH left its base rate at 0.9% and the overnight deposit rate at -0.05%, in line with the forecast of most analysts in a Reuters poll last week.

The central bank’s dovish policy has been weighing on the Hungarian currency in recent weeks. The forint traded at 324.50 at 1205 GMT, weaker than 324 before the rate decision. However, it firmed to 323 after the bank’s comments. (Reporting by Krisztina Than and Gergely Szakacs; Editing by Hugh Lawson)

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