December 18, 2018 / 1:11 PM / 3 months ago

UPDATE 2-Hungary keeps rates unchanged, shifts to more hawkish language

* Base rate, overnight deposit rate unchanged as expected

* Central bank flags expected rise in core inflation in 2019

* Bank says it will focus on persistent inflation trends

* Drops “loose monetary conditions” reference from statement

* Central bank shifts to more hawkish tone - analysts

*

By Krisztina Than and Gergely Szakacs

BUDAPEST, Dec 18 (Reuters) - Hungary’s central bank left interest rates unchanged at record lows on Tuesday but shifted to a more hawkish tone in its comments, flagging a rise in core inflation in 2019 and dropping references to loose monetary conditions.

The National Bank of Hungary, which has been Central Europe’s most dovish central bank, said core inflation could rise above 3 percent in early 2019. The bank said it would mainly focus on domestic inflationary trends in its policy decisions.

The central bank targets 3 percent headline inflation with a tolerance band of plus or minus one percentage point.

It reiterated that it was prepared for a gradual and cautious normalisation of monetary policy, “which will begin depending on the persistent inflationary developments.”

“The Monetary Council closely monitors incoming macroeconomic data and will decide to adjust monetary conditions depending on their outcome,” the rate-setting panel said.

It dropped a sentence — which still featured in its November statement — that maintaining loose monetary conditions was necessary to achieve its inflation target in a sustainable manner from mid-2019.

Eszter Gargyan, an analyst at Citigroup, said the statement showed a shift in language.

“This is just a verbal shift, but this creates room for the central bank to act earlier than it signalled previously,” Gargyan said.

The NBH left its base rate at 0.9 percent and its overnight deposit rate at -0.15 percent, both in line with analyst forecasts in a Reuters poll.

The bank said the volatility of inflation remained high, adding that headline CPI was expected to fall below 3 percent.

However, along with strong domestic demand, core inflation excluding indirect tax effects was likely to rise above 3 percent in early 2019 and then stay close to 3 percent over the monetary policy horizon, the bank added.

“Loose monetary conditions in the euro area may remain for a longer period of time. The main factor among these, determining the NBH’s monetary policy decisions, is developments in persistent domestic inflationary trends,” the bank said.

At 1505 GMT, the forint gained to 322.80 versus the euro, from 323.30 before the comments.

According to economists polled by Reuters, the base rate is unlikely to change before 2020.

But analysts say the central bank might tighten monetary conditions before then, by cutting back the liquidity it provides to banks via its currency swaps or by raising its overnight deposit rate.

The Czech central bank, which has a lower inflation target, is already tightening, while the Polish central bank has maintained a similar dovish stance as its Hungarian peer. The Polish benchmark rate is at 1.5 percent. (Reporting by Gergely Szakacs, editing by Larry King)

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