January 11, 2018 / 5:15 AM / 11 days ago

UPDATE 1-Hungarian cbank chief says base rate must stay at record low 0.9 pct

(Adds comments from Governor, background)

BUDAPEST, Jan 11 (Reuters) - Hungary’s benchmark base rate must stay at a record low of 0.9 percent and interbank rates around zero for inflation to reach the central bank’s 3 percent target by mid-2019 in a sustainable way, the bank’s Governor Gyorgy Matolcsy told weekly Figyelo.

In an interview published on Thursday, Matolcsy also said the central bank would do everything at its disposal for inflation to approach the target and to create price stability in a sustainable manner.

He said long-term government bond yields should be driven lower, with the help of the bank’s “entire policy toolkit”.

The National Bank of Hungary (NBH), Central Europe’s most dovish central bank, announced late last year that it would start buying mortgage bonds from 2018. It wants to encourage borrowers to choose fixed-rate housing loans.

Run by Matolcsy, a strong ally of rightist Prime Minister Viktor Orban, the bank wants to drive borrowing costs lower - even as global central banks and the nearby Czech central bank and Romanian central bank have started tightening.

“According to our forecast, inflation could reach the 3 percent target in a sustainable way in mid-2019,” Matolcsy said.

“For this, it is necessary to keep the base rate at a historical low and interbank rates around zero all along, and to curb long-term yields using the NBH’s entire policy toolkit.”

He reiterated that the bank had no exchange rate target, and the stability of the forint was an important factor.

Inflation was running at an annual 2.5 percent in November. December data is due on Friday.

Matolcsy said for the Hungarian economy to keep up its solid growth rates, comprehensive reforms were needed to boost competitiveness.

“A key element of this must be a further reduction in the personal income tax rate,” he said. Hungary’s personal income tax rate is at 15 percent.

Matolcsy also said Hungary should adopt the euro only when it is prepared for that, when the gap between the Hungarian economy and the euro zone narrows sufficiently.

“The crisis of the euro zone clearly showed that meeting the Maastricht criteria in itself is not enough for successful accession (to the euro) and the introduction of the euro is no guarantee for successful catching up (with the euro zone),” he said.

He did not mention a possible date for joining the euro zone. (Reporting by Krisztina Than; Editing by Himani Sarkar)

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