September 18, 2018 / 2:31 PM / 8 months ago

UPDATE 2-Hungary's central bank tweaks its tools, flags "gradual policy normalisation"

(Adds details, comments.)

* Bank keeps base rate at 0.9 percent

* Overnight deposit rate also unchanged at -0.15 pct

* Inflation has picked up but running around bank’s target

* Policy normalisation will be “gradual and cautious”

* Start of normalisation will depend on CPI outlook

By Krisztina Than and Gergely Szakacs

BUDAPEST, Sept 18 (Reuters) - Hungary’s central bank left its interest rates unchanged at record lows on Tuesday but tweaked its policy tools, saying it was preparing for a future “gradual and cautious” normalisation of its loose monetary policy.

The National Bank of Hungary (NBH), which has stuck to its dovish stance even as some other central banks in Central Europe started raising interest rates, said the start of policy normalisation would depend on the inflation outlook.

For the time being, maintaining the base rate at 0.9 percent and loose monetary conditions are necessary to reach the bank’s inflation target, the rate-setting Monetary Council said in a statement.

“The Council is prepared for the gradual and cautious normalisation of monetary policy, which will start depending on the outlook for inflation,” it said in a statement.

The Monetary Council has transformed its tool set and “now it is able to act if necessary,” Deputy Governor Marton Nagy told a news conference. “The bias of monetary policy has not changed.”

Unlike the Czech central bank, which is already raising interest rates, the National Bank of Hungary has so far stuck with its dovish bias, as has its Polish counterpart.

Nagy said when normalisation begins, the bank will first tweak its unconventional tools, before changing interest rates.

The NBH has used a wide range of unconventional tools to boost liquidity in markets and support economic growth.


The bank said it would phase out its monetary policy interest rate swaps and its mortgage bond buying programme by the end of 2018. Those programmes have backed commercial banks’ bond purchases and supported long-term government bond yields.

At the same time, the NBH said it would launch a new programme worth 1 trillion forints to help fixed-rate lending to small and medium-sized companies.

“This will contribute to developing a healthy structure for SME lending, while having a neutral impact on liquidity developments,” the Monetary Council said.

The bank will keep foreign currency swaps providing forint liquidity as part of its tools, and will adjust monetary conditions “by creating an optimal combination of two of its instruments: swaps providing forint liquidity and the interest rate corridor.”

The NBH, run by a close ally of Prime Minister Viktor Orban, has made a series of rate cuts and introduced unconventional policies in the past years, boosting the economy.

However, the forint dropped to record lows past 330 versus the euro in early July. It has regained some ground as global sentiment improved, but the plunge of Turkey’s lira has continued to weigh on the region’s currencies.

On Tuesday, the forint firmed to 323 versus the euro by 1406 GMT, from 323.75 after the bank’s comments. It was off its July lows but down from 310 at the start of 2018.

Annual inflation rose to 3.4 percent in July and August but remained within the tolerance range around the central bank’s target, 3 percent inflation, plus or minus one percentage point.

Several analysts in a Reuters poll expected the first NBH base rate hike to come in the second half of 2019. However, their median forecast sees no change in the base rate next year, before an increase to 1.6 percent by the end of 2020.

Reporting by Krisztina Than, editing by Larry King

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