Hungary central bank widens rate corridor to stem decline in forint

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  • Raises top of rate corridor by 100 bps
  • Forint initially firms, then retreats
  • Currency still down 5% for the year
  • Bank could continue rate hikes on Thursday -analyst

BUDAPEST, March 8 (Reuters) - The National Bank of Hungary (NBH) hiked the top of its interest rate corridor by 100 basis points on Tuesday to create room for further policy tightening amid a selloff driven by the war in neighbouring Ukraine.

The bank raised its collateralised loan rate by 100 basis points to 6.4%, but left other interest rates unchanged, and said it did not discuss changing the base rate (HUINT=ECI) .

The move, which some analysts had flagged after the NBH exhausted its room for manoeuvre with its biggest interest rate rise since late-2008 last week, initially bolstered the forint . The unit had sunk to record lows near 400 per euro on Monday.

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However, by 1419 GMT, the currency, which is still down 5% for the year, eased back to 388.85 per euro, weaker than 387.1 just before the announcement but 1.4% stronger on the day.

The NBH said Tuesday's move had created room for responding to market volatility with its one-week deposit facility if needed.

"If necessary, the Bank stands ready to continue to respond quickly and flexibly to commodity and financial market risks arising from the rapidly changing environment by setting the one-week deposit rate," it said in a statement.

Deputy Governor Barnabas Virag told an online briefing that inflation, which had jumped to a near 15-year-high in January, likely rose further to 8-8.5% in February, with inflationary pressures mounting amid the war in Ukraine.

However, he said risks to economic growth were on the downside. The bank will reflect those changes in its quarterly inflation report to be published later this month, he said.

Hungary will publish February inflation data on Wednesday. Economists polled by Reuters see inflation rising to 8.1%.

Virag said bets by foreign investors against the forint had increased substantially over the past weeks, but the NBH would continue its rate tightening campaign, making deals against the forint more expensive.

"Holding positions against the forint will be painful," Virag said, expressing hope that these deals, worth some 600 billion forints ($1.68 billion) over the past two weeks, would be unwound once the crisis in Ukraine eases.

Analysts at Erste Group said the move would enable the bank to raise its one-week deposit rate , which it uses to tackle short-term market volatility, further at the upcoming tender of the facility due on Thursday.

"We expect further tightening steps to be taken in the near future, as the (NBH) will likely further increase the rate of the one-week deposit ... on Thursday by another 75bp to 6.1%," Erste economist Orsolya Nyeste said in a note.

Government debt agency AKK, which temporarily suspended mandatory market making for primary dealers amid Monday's sell-off, has decided to go ahead with a bond tender planned for Thursday, but cut back the offered amounts substantially.

The Polish and Czech central banks both intervened in the market last week to prop up their falling currencies. Hungary's central bank did not comment on the market interventions.

($1 = 356.21 forints)

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Reporting by Gergely Szakacs and Anita Komuves Editing by Bernadette Baum

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