April 25, 2017 / 12:11 PM / 4 months ago

UPDATE 1-Hungary central bank holds base rate, maintains dovish stance

BUDAPEST, April 25 (Reuters) - Hungary's central bank left its base rate unchanged on Tuesday, in line with its earlier pledge to maintain a loose monetary policy, despite a rise in inflation in the first quarter.

Central European central banks have not started raising interest rates, even though inflation began edging upwards in the region from late 2016.

In a Reuters poll last week, analysts unanimously projected that Hungary's base rate would stay at a record low 0.9 percent on Tuesday, and all this year. Their median forecast is for a rise to 1.05 percent by the end of 2018.

The National Bank of Hungary (NBH), led by a strong ally of Prime Minister Viktor Orban, stopped its interest rate cuts in May 2016 and opted to ease monetary policy using unconventional methods instead.

It has squeezed out hundreds of billions of forints from its main three-month deposit tool into the economy to drive down borrowing costs for households and businesses. The measures aim to boost lending and economic growth.

The NBH also pumps forint liquidity into the interbank market via swaps, driving money market rates lower.

"Hungarian rate setters are likely to keep their very dovish monetary policy stance, something that is counterbalancing the positive effects the improving economic conditions would have on HUF," Raiffeisen analysts said in a note before the meeting.

"That said we would expect EUR/HUF to remain within its trading range of 310-315."

The forint touched four-month lows last week but regained ground after the first round of the French presidential election. On Tuesday it was unchanged after the rate decision, from levels of 311.75 before.

The latest data have also indicated a regional retreat in inflation pressure. Hungarian inflation unexpectedly retreated to 2.7 percent March from 2.9 percent in February.

The central bank has an inflation target of 3 percent, with a one-percentage-point tolerance range either side.

Analysts' median forecasts in the poll showed that inflation may stay near 3 percent at least until the end of 2019. (Editing by Larry King)

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