* Markets have tested central bank’s dovish stance
* Bank has kept all interest rates on hold
* Inflation still running around bank’s target
* First rate hike seen only in 2019 -Reuters poll
* Central bank maintains loose monetary conditions (Recasts with central bank’s comments, updates forint)
By Krisztina Than
BUDAPEST, July 24 (Reuters) - Hungary’s central bank left its interest rates unchanged at record lows on Tuesday as expected, ignoring the forint’s recent losses against the euro which have so far not pushed inflation higher.
The National Bank of Hungary, which has made a series of rate cuts and introduced unconventional policies in the past years, reiterated that global market volatility justified a more cautious approach to policy, keeping its dovish overall message.
“The Council will ensure the maintenance of loose monetary conditions, necessary to achieve the inflation target in a sustainable manner, by using the current set of monetary policy instruments,” the rate-setting Monetary Council said in a statement.
The Hungarian bank has been facing its first test from financial markets as global rates have started to rise and emerging markets sold off.
The global jitters sent the forint to all-time lows past 330 versus the euro in early July, making it the weakest performer among Central European currencies so far in 2018. The forint recovered to around 327 by Tuesday and was unmoved by the bank’s comments.
Its weakness has been partly due to the central bank’s loose monetary policy, which leaves Hungary’s base rate at 0.9 percent , below benchmark rates in Poland, the Czech Republic and Romania. The Czech and Romanian central banks are already firmly in tightening mode.
A Reuters poll last week projected the bank was unlikely to change its base rate or the -0.15 percent overnight deposit rate this year.
“Considering domestic fundamentals and the external environment as well, a normalisation of loose monetary conditions could start in 2019 at the earliest,” CIB Bank analysts said in a note after the rate decision.
They said this outlook could change if the European Central Bank shifts to a more hawkish stance, or the weaker forint exchange rate or oil prices result in a jump in inflation.
At its June meeting, the NBH said loose monetary conditions could no longer prevail until the end of its 5 to 8 quarter policy horizon, for the first time flagging an end to an era of cheap money.
The bank said decisions of the ECB could have a significant influence on its policy.
The ECB has guided markets to expect steady euro zone rates “through the summer” of 2019 and announced it will end a 2.6 trillion euro bond-buying programme in December.
With Hungarian inflation still running around its 3 percent target, the NBH is trying to boost economic growth with cheap loans to households and companies. Annual inflation picked up to 3.1 percent in June, mainly due to fuel prices.
The central bank targets 3 percent inflation with a tolerance band of plus/minus one percentage point.
The bank has said its only anchor was inflation.
Analysts said the bank could start tightening policy first by withdrawing liquidity from the interbank market, via its foreign exchange swap tools, rather than by raising rates.
“According to our expectations, liquidity injections may be gradually scaled down by June 2019,” Citibank said in a note.
Reporting by Krisztina Than; editing by David Stamp