(Adds central bank comments)
* Central bank keeps base rate at record low 0.9 pct
* Shifts to unconventional easing instead
* Will extract at least HUF 200-400 bln from 3-month depo
* Caps funds parked in 3-month deposit at HUF 900 bln by
By Krisztina Than and Gergely Szakacs
BUDAPEST, Sept 20 Hungary's central bank kept
its base rate on hold on Tuesday and said it would ease monetary
conditions further by squeezing out at least 200-400 billion
forints from its main deposit tool into the economy by year-end.
The bank, under Governor Gyorgy Matolcsy, an ally of Prime
Minister Viktor Orban, wants private banks to offer cheaper
loans to households and firms and to buy government debt instead
to boost growth and reduce debt-financing costs.
The National Bank of Hungary said it would cap funds placed
by commercial banks in its main 3-month deposit tool at 900
billion forints ($3.26 billion) by the end of this year, and
that this should drive down interbank rates and debt yields.
"The purpose of today's decision is to stimulate the
interbank market further and to facilitate the targeted easing
of monetary conditions by way of unconventional instrument", the
bank said in a statement.
The bank, which had stopped its rate cuts earlier this year,
said it was ready to apply stronger limits to its main
three-month deposit next year if reaching its 3 percent
inflation target made this necessary.
"The NBH is designing fine-tuning instruments to offset
potential considerable and persistent liquidity shocks," it
added. The Monetary Council will decide on operative details of
the fine-tuning instruments in October. These instruments could
include, if needed, forint swaps provided by the central bank.
A surprise credit rating upgrade by Standard & Poor's on
Friday has bolstered Hungary's forint and demand for
A Reuters poll suggested the bank could cap the funds in its
deposit tool at around 1 trillion forints ($3.6 billion) by the
end of 2016.
The central bank expects that a cut in liquidity in the
deposit tool would reduce borrowing costs by pushing down the
BUBOR interbank rate.
It flagged an end to rate cuts in May after slashing its
base rate to 0.9 percent from a 2012 peak of 7 percent.
"The central bank is migrating to a system whereby the
policy rate will be only a reference in a rates corridor
framework," Citibank said in a note.
Analysts' median forecasts showed the base rate could stay
on hold throughout this year and next.
With annual inflation running at -0.1 percent in August, the
bank is focused on boosting economic growth, which picked up to
an annual 2.6 percent in the second quarter but could still be
below last year's full-year growth of around 3 percent.
For the central bank's fresh economic forecasts please see
($1 = 275.62 forints)
(Editing by Mark Heinrich)