November 21, 2017 / 3:19 PM / 25 days ago

UPDATE 2-Hungarian central bank to buy mortgage bonds, seeking to drive yields lower

(updates with central bank comments, forint)

* Bank leaves base rate at 0.9 pct as expected

* Overnight deposit and lending rates also unchanged

* New interest rate swaps from January 2018

* To start buying 3-year and longer-dated mortgage bonds

* Wants to lock in mortgage borrowers at fixed rates

* News conference at 1430 GMT

By Krisztina Than and Marton Dunai

BUDAPEST, Nov 21 (Reuters) - Hungary’s central bank said on Tuesday it will start buying mortgage bonds in order to push yields lower on longer-dated government bonds and to encourage borrowers to choose fixed-rate housing loans.

It also said it would launch a new unconditional 5-year and 10-year interest rate swap (IRS), at up to 300 billion forints ($1.13 billion) in the first quarter of 2018.

Announcement of both new policy terms followed a widely expected decision to keep interest rates on hold at record lows. But it dropped a previous reference to possible further easing from the end of its statement.

The bank, nonetheless, wants to drive borrowing costs lower -- even as global central banks and the nextdoor Czech central bank have started tightening.

“The Council considers it important that the loose monetary conditions have their effect not only at the short but also at the longer end of the yield curve,” the rate-setting Monetary Council said in a statement.

“The Council will closely monitor developments in monetary conditions and will ensure the persistence of loose monetary conditions over a prolonged period by using the extended set of monetary policy instruments,” it added.

It said it would launch the swap and the targeted programme aimed at purchasing mortgage bonds with maturities of three years or more.

“Both programmes will ... contribute to an increase in the share of loans with long periods of interest rate fixation,” the bank said.

The bank expects inflation to reach its target of 3 percent plus/minus 1 percentage point by mid-2019, for which sustained loose monetary conditions are necessary, it said.

In September the bank cut its overnight deposit rate by 10 basis points to -0.15 percent, and since then it has increased liquidity in forint markets via forex swap tenders.

The forint has eased to 312.86, its weakest levels versus the euro since early May in the past days, before the bank’s meeting. It traded at 313 after the meeting on Tuesday.

The bank is bucking a global tendency of raising interest rates, without worrying about inflation, which slowed to an annual 2.2 percent in October.

According to the median forecasts in the Reuters poll, the base rate should stay unchanged at 0.9 percent this year and next, and rise to 0.97 percent by the end of 2019.

Reporting by Krisztina Than and Marton Dunai; Editing by Jeremy Gaunt

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