UPDATE 2-Hungary cenbank affirms loose policy stance, sees downside price risks

(Updates with policy statement, analyst comment)

* Base rate 0.9%, overnight deposit rate -0.05%

* Decision in line with analyst forecasts

* Forint a touch stronger from pre-decision levels

* Policy normalisation will be slow and gradual -economist

By Gergely Szakacs

BUDAPEST, Oct 22 (Reuters) – The National Bank of Hungary (NBH) left interest rates unchanged and affirmed its accommodative policy stance at its monthly meeting on Tuesday, reiterating its view that downside inflation risks have strengthened due to weakening European activity.

The decision to keep the base rate at 0.9% and the overnight deposit rate at minus 0.05% was in line with a unanimous prediction of economists polled by Reuters, who foresee no change in official rates at least until the end of 2020.

At 1307 GMT, the forint traded at 329.70 versus the euro, a touch stronger than 330.1 just before the Monetary Council announced its interest rate decision.

The currency has recently regained some ground lost in previous months amid hopes that a no-deal Brexit could be avoided. Even so, it remains central Europe’s worst performer with a nearly 3% loss for the year.

Last month, the NBH reversed an earlier tightening in liquidity conditions and warned of downside risks to Hungary’s growth outlook. The bank said its 3% inflation target could be reached even with the forint trading around 335 to the euro.

“The monetary policy stance will continue to be accommodative, economic agents’ financing costs will be favourable,” the Monetary Council said in a statement.

“The downside inflation risks have strengthened further, reflecting the effects of the slowdown in European economic activity,” the statement added. “Due to the measures taken by global leading central banks, the external monetary policy environment has become looser.”

Headline inflation slowed to an annual 2.8% last month, below market forecasts. However, tax-adjusted core inflation, the bank’s preferred measure of lasting price trends, rose to 3.4% from 3.2% in August.

The bank forecasts this price gauge will average 3.4% this year and next, according to its September inflation report, below its June forecasts. Analysts polled by Reuters expect headline inflation to average around 3.3% a year through 2021.

The bank’s policy stance also reflects global monetary easing and a deteriorating euro zone outlook. The International Monetary Fund has said the NBH’s accommodative stance remains appropriate, while risks should be monitored.

“The normalisation of monetary conditions will presumably be slow and gradual as inflation appears to be under control for now … and external monetary conditions also eased substantially,” said economist Gergely Suppan at Takarekbank.

“Therefore, keeping domestic monetary conditions unchanged followed by a gradual tightening over the medium term could be sufficient to strengthen the forint, which … can support meeting the inflation target,” Suppan added. (Reporting by Gergely Szakacs Additional reporting by Marton Dunai Editing by David Holmes)

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