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UPDATE 2-Hungary central bank leaves rates unchanged, sends hawkish signal on inflation

(Recasts with central bank comments, GDP and CPI forecasts)

* Base rate 0.6%, O/N depo rate -0.05%

* Decision in line with expectations

* Bank in a bind between poor growth, high inflation

* Cuts 2020 GDP forecast, raises CPI projections

BUDAPEST, Sept 22 (Reuters) - Hungary’s central bank left interest rates on hold on Tuesday, as expected, and struck a hawkish tone with a warning it would be ready to use its policy tools if persistently higher inflation warranted such action.

Even as the bank slashed its economic projection for this year, forecasting a 5.1% to 6.8% contraction from a previous prediction of moderate growth, it dropped an earlier reference to additional economic stimulus from its post-meeting statement.

The bank, led by Governor Gyorgy Matolcsy, an ally of Prime Minister Viktor Orban, needs to walk a fine line between supporting an economy hit by the coronavirus and keeping a lid on inflation, which has put the forint currency under pressure.

“The Council remains committed to maintaining price stability during the coronavirus pandemic and pays particular attention to the persistence of inflationary effects arising as a result of the economic recovery,” the Monetary Council said.

“If warranted by a persistent change in the outlook for inflation, the Council will be ready to use the appropriate instruments,” it said as the bank raised its inflation forecasts for 2020 and 2021.

The National Bank of Hungary (NBH) kept its base rate unchanged at 0.6%, in line with economists’ forecasts, after 30 basis points worth of cuts in June and July to bolster the economy.

At 1323 GMT, the forint traded at 360.80 after the comments, firming from 362 against the euro before the announcement.

Headline inflation hit 3.9% year-on-year in August, near the top of the bank’s 2% to 4% target range, while tax-adjusted core inflation, its preferred measure, rose to 4.2%.

“One or two strong references to the inflation situation, complemented by a message that the NBH doesn’t have the appetite to ease further, could be enough,” economist Peter Virovacz at ING said ahead of the decision.

“With that, the central bank can buy precious time until inflation drops back closer to the middle of its 2–4% target range.” ($1 = 0.8515 euros) (Reporting by Gergely Szakacs and Krisztina Than Editing by Tomasz Janowski)

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