April 28, 2020 / 12:09 PM / a month ago

UPDATE 1-Hungarian central bank keeps rates on hold, to announce QE terms

* Central bank keeps base rate at 0.9% as expected

* Details of bond buying QE expected to come later on Tues

* Hungary’s funding needs rise this year

* Cbank QE expected to support domestic bond market

By Krisztina Than and Gergely Szakacs

BUDAPEST, April 28 (Reuters) - Hungary’s central bank left interest rates on hold on Tuesday and is expected to announce details of its bond-buying programme to help Hungary finance its efforts to soften the economic impact of the novel coronavirus pandemic.

All 15 economists in a Reuters poll said last week that the bank would leave its base rate at 0.9%. Analysts also said the overnight deposit rate would remain at -0.05%.

Earlier this month, the National Bank of Hungary (NBH) had abandoned its ultra-loose policy stance as it navigated a tricky path of preventing a sell-off in the forint while providing support for the shrinking economy.

The bank tightened policy in two steps at the start of April to arrest a fall in the forint, which sank to record lows near 370 versus the euro. That propped up the currency.

The NBH has also said it will begin buying bonds in the secondary market to support the government securities market and re-open mortgage-bond purchases to improve long-term funding to the banking sector.

The bank is expected to disclose the terms of the programme in a statement at 1300 GMT.

“We think the central bank’s quantitative easing (QE) will need to be sizable, probably with an initial target at least in the order of HUF 1,000 billion, or around 2.2% of GDP,” Bank of America analysts said in a note.

“The ... NBH will have to play an essential role in fiscal financing amid rising budget deficit, dwindling access to retail funding and limited absorption capacity in the banking sector.”

Hungary has raised its budget deficit target to 2.7% of GDP and to finance the increased issuance needs, it quickly issued 2 billion euros worth of eurobonds last week as forint-denominated government bond sales to households declined.

However, analysts said the government’s projections looked overly optimistic and the budget deficit could rise to 4.5% of economic output, while the economy could shrink by 4.1% this year.

Finance Minister Mihaly Varga told Reuters on Friday that the economy would likely contract more than the government’s earlier projection for 3%. Varga said the government will revise its GDP and deficit projections later this week.

The central bank has already announced a massive lending programme for companies and begun a series of liquidity-boosting measures for banks in recent weeks. (Reporting by Krisztina Than, editing by Larry King)

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