January 22, 2020 / 3:49 PM / a month ago

'Incredibly dovish' Hungary central bank to hold fire amid inflation rise: Reuters poll

BUDAPEST (Reuters) - The National Bank of Hungary (NBH) will keep interest rates around historic lows next Tuesday with inflation set to retreat slowly from December’s seven-year highs and economic growth to lose steam in coming years, a Reuters poll showed.

All 18 analysts surveyed between Jan. 20-22 said the base rate HUINT=ECI would remain at 0.9% while all 14 who gave a forecast for the overnight deposit rate HUODPO=ECI said it would stay at minus 0.05% at the Jan. 28 policy meeting.

The poll sees the base rate staying unchanged at least until the end of 2021, while the overnight deposit rate is expected to rise 30 basis points to 0.25% by the end of next year.

Headline inflation rose to a seven-year-high of 4% last month, while core inflation ticked down to 3.9%. The central bank’s preferred measure of lasting price trends, tax-adjusted core inflation, retreated to 3.5%.

The bank targets 3% inflation with a tolerance band of a percentage point on either side.

Deputy Governor Marton Nagy said last week that the increase in headline inflation was in line with the bank’s forecast, adding that no policy reaction was needed.

“We think that the incredibly dovish central bank will look through above-target inflation and maintain its loose monetary stance by keeping interest rates unchanged,” Liam Peach, an analyst at Capital Economics said in a note.

“The loose policy stance is likely to cause macro imbalances to build further over the next few years, with the current account position deteriorating and the forint coming under more pressure.”

The forint EURHUF=D3 skirted within record-lows at 337 versus the euro this week, continuing to underperform its regional peers over Hungary’s commitment to its ultra-loose monetary policy.

Analysts see headline inflation running at 3.4% this year, unchanged from 2019 levels, before dropping to 3.1% by 2022.

Economic growth is projected to slow to 3.5% in 2020 from nearly 5% last year. Prime Minister Viktor Orban’s government is planning a new round of tax cuts to bolster economic growth.

“Against the expectation that inflation will likely slow towards 3% by year-end and no clear directions from the ECB and the Fed, the NBH will likely maintain its policy approach,” economists at Bank of America said in a note.

“The central bank can fine-tune in reaction to the exchange rate developments, likely with a strong preference for EUR/HUF to stay in the recent range.”

Reporting by Gergely Szakacs; editing by Philippa Fletcher

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