April 28, 2020 / 1:47 PM / a month ago

UPDATE 2-Hungarian central bank keeps rates on hold, launches bond purchases

(Adding central bank statement, details of QE)

* Central bank keeps base rate at 0.9% as expected

* Bank to start buying govt bonds and mortgage bonds in May

* To focus on govt bonds with at least 3 years to maturity

* Hungary’s funding needs rise this year

* Cbank QE expected to support domestic bond market

By Krisztina Than and Gergely Szakacs

BUDAPEST, April 28 (Reuters) - Hungary’s central bank left interest rates on hold on Tuesday and said it would begin its bond-buying scheme and mortgage bond purchases on May 4 without any set target amount, to soften the economic impact of the novel coronavirus pandemic.

The bank said it would not restrict the scope of maturities of government securities to be purchased but would focus on securities with at least three years to maturity. “The Monetary Council did not set a total amount of purchases for either programme. The NBH will perform a technical revision when stock increases reach HUF 1,000 billion in government securities and HUF 300 billion in mortgage bonds,” it said.

It said it would buy government securities in the secondary market at regular weekly auctions and in transactions outside the auctions.

The NBH said its asset purchase programmes would allow it “to influence monetary conditions at the longer part of the yield curve.”

The bank said it would carry out the purchases “as long as economic and financial developments arising from the coronavirus pandemic justify it.”

All 15 economists in a Reuters poll said last week that the bank would leave its base rate at 0.9%. Analysts also said the overnight deposit rate would remain at -0.05%.

Earlier this month, the NBH had abandoned its ultra-loose policy stance as it navigated a tricky path of preventing a sell-off in the forint while providing support for the shrinking economy.

The bank tightened policy in two steps at the start of April to arrest a fall in the forint, which sank to record lows near 370 versus the euro. That propped up the currency.

The NBH has also said it will begin buying bonds in the secondary market to support the government securities market and re-open mortgage-bond purchases to improve long-term funding to the banking sector.

Hungary has raised its budget deficit target to 2.7% of GDP and to finance the increased issuance needs, it quickly issued 2 billion euros worth of eurobonds last week.

However, analysts said the government’s projections looked overly optimistic and the budget deficit could rise to 4.5% of economic output, while the economy could shrink by 4.1% this year.

Finance Minister Mihaly Varga told Reuters on Friday that the economy would likely contract more than the government’s earlier projection for 3%.

The central bank has already announced a lending programme for companies and begun a series of liquidity-boosting measures for banks in recent weeks. (Reporting by Krisztina Than, editing by Larry King)

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