April 2, 2019 / 5:03 AM / 24 days ago

UPDATE 1-Strong forward guidance would be "irresponsible" -Hungary cenbank

* Strong European slowdown requires cautious approach -Nagy

* Cbank will not make long-term commitment on policy

* Recession in Europe would create “entirely new situation” -Nagy

* Cbank does not see signs of overheating in local economy (Adds more comments, detail)

BUDAPEST, April 2 (Reuters) - Giving strong forward guidance on Hungary’s monetary policy outlook would be irresponsible in the current volatile international environment, said deputy central bank governor Marton Nagy.

Hungary’s central bank raised its overnight deposit rate by 10 basis points to -0.05 percent last Tuesday, halting a nearly seven-year run of monetary easing, in what the bank’s governor called a one-off move justified by inflation trends.

The smaller-than-expected move sparked a sell-off in the forint as the bank dropped its reference on a “gradual and cautious” process of normalising its loose monetary policy, which led market players to expect a tightening cycle.

“The international environment changes rapidly,” Nagy told business news website portfolio.hu in an interview published on Tuesday.

“In that situation, any strong forward guidance would be irresponsible and would jeopardise our credibility,” he added.

Nagy said last week that balanced risks to Hungary’s inflation outlook mean monetary loosening and tightening are both options as the central bank’s next step.

“It is wrong to assume that ‘normal’ would mean a return to some past situation either in the structure of the monetary policy toolkit or the level of interest rates,” Nagy said. “We now consider the current monetary conditions to be normal.”

Nagy reiterated that the bank’s baseline economic scenario was surrounded by a high degree of uncertainty, adding that any further slowdown or even a recession in the European economy would create “an entirely new situation” for monetary policy.

He said given that level of uncertainty, there was an “exceedingly high” risk that the bank could make an error by tightening further, when it would not be really necessary.

Nagy said despite continued double-digit wage rises, a surge in real estate prices and a plunge in Hungary’s current account surplus, the central bank did not see signs of overheating in the domestic economy.

He added however that the strong wage rises could trigger a wave of consolidation in the local small and medium-sized business sector, wiping out inefficient businesses.

Nagy also said the central bank had drafted an action plan with local banks to let Hungarians change their existing floating-rate mortgages to fixed-rate loans in a “quick and simple” process to curb risks from any change in interest rates. (Reporting by Gergely Szakacs; editing by Darren Schuettler)

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