UPDATE 1-Hungary central bank sanguine on Fed, says inflation to keep low

Thu Dec 19, 2013 5:03am EST

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BUDAPEST, Dec 19 (Reuters) - Hungary's central bank said on Thursday that average inflation would remain below its 3 percent target in the next two years and prevailing euro/forint exchange rate levels were consistent with the achievement of this medium-term inflation goal.

The bank's chief economist, Daniel Palotai, also told reporters after the publication of the bank's new inflation report, that the bank's rate-setting Monetary Council had been prepared for the announcement of the U.S. Federal Reserve on Wednesday about a tapering of its stimulus programme.

He said the Fed had prepared markets well for the announcement, which did not come as a surprise, and reinforced the Hungarian bank's message that interest rate cuts could continue but probably at a slower pace.

"It did not come as unexpected ... and with this in mind, with a view of tapering, the Monetary Council signalled on Tuesday that the pace of interest rate cuts may slow," he said.

The Hungarian bank has cut interest rates by a total of 4 percentage points since August 2012 to a record low of 3 percent, helped by heavy inflows of capital into Hungary, spurred as in other emerging markets by the Fed's bond-buying.

The forint, seen by some analysts as one of the main potential casualties in emerging markets to a reduction in the flow of cheap dollars, eased 0.2 percent to the euro by 0940 GMT, tracking a mild global reaction to the Fed.

Palotai said the ability of the Hungarian economy to withstand potential external shocks has improved significantly.

Hungary's budget deficit is expected to be well below 3 percent of gross domestic product this year and next, and it is projected to continue posting a substantial surplus on its current account, the bank said on Thursday. For detailed forecasts pls see:

The central bank projects that inflation will rise near its 3 percent medium-term target only in the last quarter of 2015.

It sees average annual inflation at 1.3 percent next year, but this projection does not yet include the impact of a planned third round of government-improved utility price cuts, central bank economist Barnabas Virag told reporters.

Prime Minister Viktor Orban's government, which faces elections early next year, has cut households' gas and electricity bills by a total of 20 percent this year in two steps, which has also helped curb inflation. The ruling Fidesz party has said a new round of price cuts would come early next year, but did not indicate the size.

Virag said the new price cuts, assuming that they would be similar in size to the previous two cuts, could bring down inflation by around 1 percent, and most of this would impact next year's inflation. (Reporting by Krisztina Than; editing by Patrick Graham)

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