Hungary central bank leaves rates unchanged, as expected

BUDAPEST: The National Bank of Hungary (NBH) left interest rates unchanged on Tuesday, as expected, amid slowing domestic inflation, a worsening euro zone economic outlook and global monetary easing.

The decision to keep the base rate at 0.9% and the overnight deposit rate at -0.05% was in line with the unanimous forecast of analysts in a Reuters poll last week.

Hungary's dovish central bank has said any necessary adjustment of monetary conditions would be implemented through changes in the overnight deposit rate or its tools designed to adjust market liquidity.

However, the central bank was under no pressure to act right now. Inflation has slowed, and the economic outlook in the country's main trading partner, Germany, has turned negative.

"Inflation may be still above target, but it is falling back; what is more, the real economic situation is plummeting across the world, prominently in Germany - an important economic partner. The European Central Bank is expected to ease policy substantially in September using depo rate cuts and further QE," Commerzbank said in a note before Tuesday's meeting.

The analysts said the NBH might signal an easier policy stance in its statement, abandoning policy normalisation.

"The MPC may still maintain cautious language for some time longer as inflation is still above-target and the forint is currently weak within a risk-off environment, but the signal should be clear enough," Commerzbank said.

The NBH has said it would adjust its policy stance at the meetings where rate-setters discuss the quarterly inflation report. The next such meeting is in September.

At 1203 GMT, the forint, which has weakened towards 330 to the euro since the July rate meeting, traded at 328.85, unchanged from levels just before the announcement. The bank will publish a policy statement at 1300 GMT.

Hungarian core inflation, which reached the top of the NBH's 2% to 4% target range in May, had retreated to 3.7% by July. Last month, the bank said data since its June meeting confirmed its view of an expected decline in inflation from the end of this year.

In the July poll, economists forecast Hungary's overnight deposit rate would turn positive again some time next year, with about 10 basis points of increases pencilled in.

However, in the August poll, the median projection of six analysts who forecast the overnight deposit rate next year showed no change.