June 23, 2020 / 12:22 PM / 18 days ago

UPDATE 2-Hungary trims base rate in "one-off" move as pandemic hits economy

(Updates with comments from Deputy Governor Virag, new economic forecasts, central bank policy statement)

* Base rate cut to 0.75%, O/N depo rate -0.05%

* Analysts expected no change in interest rates

* Forint weakens to one-month-low

* Bank slashes 2020 economic growth forecast

By Gergely Szakacs and Krisztina Than

BUDAPEST, June 23 (Reuters) - The National Bank of Hungary unexpectedly cut its base rate by 15 basis points to 0.75% on Tuesday, its first such move in four years, responding to greater-than-expected damage to the economy from the coronavirus pandemic.

Analysts polled by Reuters had projected no change in interest rates at Tuesday’s meeting, where the bank slashed its 2020 economic growth projection to 0.3% to 2% from March’s 2% to 3% forecast.

The forint, which hit record lows at 370 versus the euro in April, immediately weakened after the surprise rate cut, falling to one-month-lows past 350 per euro.

The NBH left the overnight deposit rate at -0.05%, but it said the interest rate on its one-week deposit facility should also be lowered in line with the base rate.

The Czech Republic and Poland have also lowered interest rates recently to support their economies in the aftermath of the pandemic.

“We have decided about a general and cautious fine-tuning of monetary conditions,” newly appointed Deputy Governor Barnabas Virag told an online news conference, adding that Tuesday’s cut was a one-off move, not the start of an easing cycle.

He said the latest data from the European Union, Hungary’s main trading partner, pointed to sustained weakness in price growth, which would dampen domestic price pressures. At home, the bank expects more restrained pricing in services.

Virag said tax-adjusted core inflation, the bank’s preferred measure of lasting price trends, was seen much lower next year than earlier.

Analysts expect Hungary’s economy to shrink by 5.1% this year after the coronavirus pandemic shut factories and curtailed activity. Virag said the economy would shrink by about 7% in the second quarter.

“To ensure that the Hungarian economy is able to produce a V-shaped recovery from the third quarter, it is key to maintain households’ purchasing power and accelerate a rebound in investments,” he said. (Reporting by Krisztina Than and Gergely Szakacs, editing by Larry King)

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