April 23, 2020 / 8:27 AM / a month ago

Hungary central bank to hold fire after surprise rate rise, QE in focus: Reuters poll

BUDAPEST (Reuters) - The National Bank of Hungary (NBH) will leave its key interest rates unchanged next Tuesday after an unexpected increase in lending rates early this month to halt the slide of the forint, economists said in a Reuters poll.

FILE PHOTO: Hungarian forint notes are seen in this photo illustration taken in Budapest February 6, 2014. REUTERS/Bernadett Szabo/File Photo

All 15 economists in the April 20-22 survey said the bank would leave its base rate HUINT=ECI at 0.9%. Twelve analysts also gave a forecast for the overnight deposit rate HUODPO=ECI, saying it would also remain at -0.05%.

The bank tightened policy in two steps at the start of April to arrest a fall in the forint EURHUF=D3, which sank to record lows near 370 versus the euro, pressured by the coronavirus pandemic and years of ultra-loose Hungarian monetary policy.

The central bank is navigating a tricky path of preventing a sell-off in the currency, while providing sufficient support for the shrinking economy with other tools.

“We currently expect the base rate to remain unchanged ahead but risks are skewed towards tighter monetary policy in the short term as long as FX remains volatile,” said economist Georgi Deyanov at Morgan Stanley.

The central bank has said it could raise the 0.9% rate on its new one-week deposit tool if market conditions justify.

Next Tuesday the NBH will decide about the terms of a planned bond-buying programme, which the bank could launch in early May, its Governor said on Thursday.

Analysts polled by Reuters expect the economy to shrink by 4.1% this year, followed by a 4.7% rebound in 2021, making the central bank’s forecast for 2-3% economic growth this year, issued just a month ago, look wildly optimistic.

Some economists see Hungary contracting by 8-9% in 2020, a worse scenario than during the global financial crisis.

The budget deficit is seen rising to 4.5% of economic output, signalling widespread scepticism about the government’s pledge to keep the shortfall below a 3% threshold despite the rising costs of fighting the virus in a shrinking economy.

“For the next two and a half years, I think the base rate will remain unchanged as the new, symmetric interest rate corridor will give enough flexibility for the NBH to react,” said economist Peter Virovacz at ING.

“A significant pressure in EM FX and underperformance of the forint might trigger another hike by the NBH using its 1-week deposit facility. The highest chance for such a move is in 4Q20, when coronavirus can spread.”

Reporting by Gergely Szakacs; Editing by Peter Graff

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