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UPDATE 1-Hungarian central bank holds rates as inflation remains subdued
August 22, 2017 / 12:13 PM / in 2 months

UPDATE 1-Hungarian central bank holds rates as inflation remains subdued

* Base rate stays at 0.9 pct, in line with expectations

* Forint unchanged after decision

* Bank has been easing monetary conditions with other tools

* Rates seen on hold this year and next -Reuters poll

* Bank to release statement at 1300 GMT

By Krisztina Than

BUDAPEST, Aug 22 (Reuters) - Hungary’s central bank kept interest rates unchanged as expected on Tuesday, as relatively low inflation allows the bank to maintain loose monetary conditions despite gradually rising global interest rates.

Average annual inflation is unlikely to reach its 3 percent target before 2019 despite strong growth and surging wages in the economy, both the central bank and analysts say.

Central Europe’s most dovish central bank could hold its main base rate at 0.9 percent all through this year and next, even as interest rates elsewhere are on the rise, a Reuters poll of analysts showed last week.

In Central Europe, the Czech central bank lifted its interest rates from near zero early this month, the first rate increase in the European Union since 2012.

In contrast, the National Bank of Hungary may loosen monetary conditions further using unconventional tools, especially if the forint, which is near its strongest levels against the euro since May 2015, strengthens further, some analysts have said.

In its post-rate meeting statement last month the bank flagged possible further loosening in monetary conditions with unconventional tools if needed, saying inflation would reach its target in a sustainable way only in early 2019.

In a bid to reduce market lending rates, the bank has been reducing the stock of its three-month deposits and pumped liquidity into markets via forex swaps.

It said rising wages had not posed any upward pressure to inflation so far.

Data earlier on Tuesday showed that gross wages jumped by 14.4 percent in annual terms in June, picking up from 12.9 percent in May.

“Due to labour shortages, wage inflation in Hungary has been rising at double digit levels,” Barclays said in a note.

“Despite this strong rise in underlying inflationary pressure, we believe that the NBH will likely keep policy easy until at least Q2 18, after the parliamentary election,” Barclays added.

In the Aug. 14-17 Reuters survey, the consensus forecasts showed its benchmark interest rate would remain unchanged this year and next, and a moderate rise to 1.2 percent by the end of 2019.

The policy loosening by the central bank, led by a strong ally of Prime Minister Viktor Orban, has helped to make loans cheaper for businesses and households. Keeping growth at around 4 percent is a cornerstone of Orban’s campaign for parliamentary elections in April 2018.

The forint traded at 303.70 versus the euro at 1206 GMT, unchanged from levels before the rate announcement. (Reporting by Krisztina Than; Editing by Raissa Kasolowsky)

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