June 20, 2017 / 12:07 PM / 2 years ago

UPDATE 2-Hungarian central bank flags possible easing, cuts deposit cap

(Adds central bank comments from statement, analyst)

* Base rate unchanged at 0.9 pct, as expected

* Bank reduces cap on 3-month deposits further

* Says downside risks to inflation have increased

* Sees CPI target achieved only from early 2019

* Flags further possible unconventional easing

By Krisztina Than and Gergely Szakacs

BUDAPEST, June 20 (Reuters) - Hungary’s central bank on Tuesday pushed more funds than expected from its three-month deposits into the economy to help cut borrowing costs, and said it was ready to ease further if below-target inflation persists.

It kept its base rate on hold, however, opting for the unconventional easing.

With the bank ruling out further cuts in its main policy rate, reducing the stock of its three-month deposits and pumping liquidity into markets via forex swaps have emerged as its key tools to curb market rates. This way the bank can make loans cheaper for businesses and households.

On Tuesday, it kept its dovish bias and squeezed out more funds from its deposit tool than analysts in a Reuters poll had predicted.

The bank also said it expected to achieve its 3 percent inflation target in a sustainable manner only from early 2019, half a year later than it previously anticipated. It added that downside risks to inflation have increased.

It decided to lower its cap on three-month deposits to 300 billion forints ($1.08 billion) by the end of September from 500 billion at the end of June, cutting it below analysts’ forecast for a 350 billion forint new cap.

The bank said the aim of the new limit was “to maintain the loose monetary conditions achieved.”

“If inflation remains persistently below the target, the Council will stand ready to ease monetary conditions further using unconventional, targeted instruments,” the Monetary Council also said in a statement.

The National Bank of Hungary’s (NBH) decision to hold its base rate at a record-low 0.9 percent was anticipated by all analysts in a Reuters poll that forecast no change until the second quarter of 2019.

The forint traded at 308.70 versus the euro, compared with 308.60 before the rate announcement.

The NBH ended its cycle of base rate cuts a year ago.

Since then it has boosted liquidity to keep money market interest rates low, by accepting less money in three-month deposits and providing commercial banks with hundreds of billions of forints through forex swap tenders.

Analysts at brokerage Equilor said the shift in the achievability of the inflation goal to early 2019 from mid-2018 was an important signal from the NBH.

“Accordingly, the current loose monetary policy can remain in place for longer than earlier expected, and this could weaken the forint in the short term,” Equilor said in a note.

Despite a jump in annual economic growth to 4.2 percent in the first quarter, inflation remains moderate.

Running at 2.1 percent in annual terms in May, it is below the bank’s 3 percent target which has a one percentage point tolerance either side. ($1 = 275.92 forints) (Reporting by Gergely Szakacs; editing by Jeremy Gaunt)

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