Hungary central bank holds rates, as promised

Hungary's central bank kept its base rate on hold at 1.35 percent on Tuesday, as expected, after it officially ended its easing cycle last month to join other central European countries that have already finished cutting. Interest rates are at record lows across Central Europe and the US Federal Reserve may start raising its rates as early as September. With economic growth relatively strong in the EU's emerging economies, analysts see little chance the region's central banks will resume cutting rates.
All 19 economists in an August 13-17 Reuters poll had said Hungary's rates would remain unchanged on Tuesday. The National Bank of Hungary (NBH) ended three years of rate cuts in July and pledged to keep rates on hold for a long time. But it is effectively easing policy by revamping its monetary policy tools, starting in September.
The bank will make three-month deposits its main policy rate and has begun squeezing bank funds from its two-week deposits. At the same time, it is providing commercial banks with cheap hedging of government bond buying through new long-term interest rate swap facilities. "Policy conditions are still easing as the NBH pushes liquidity out of its balance sheet; this implies a continued easing of the monetary policy stance," the Royal Bank of Scotland said in a note on Tuesday.
It said Hungarian rates would stay on hold for an extended time, with the central bank probably showing "more tolerance" to a weaker forint. The forint eased to a seven-week low of 317 versus the euro on Monday as global markets reacted to fears of economic slowdown in China. But it rebounded quickly and was trading around 312 on Tuesday, supported by healthy growth, a low budget deficit and a big current account surplus. Hungary's annual inflation ran at 0.4 percent in July, but consensus forecasts in the Reuters poll suggested it could average 2.4 percent by next year and 2.5 percent in 2017.
Second-quarter figures have shown a slowdown in annual economic growth to 2.7 percent from 3.5 percent in the first quarter, below expectations, but still at a strong pace.