February 27, 2018 / 1:07 PM / 23 days ago

UPDATE 1-Hungarian central bank holds rates, maintaining loose monetary conditions

* Bank leaves base rate at 0.9 pct as expected

* Overnight deposit and lending rates also unchanged

* Central bank keeps policy loose, inflation below target

* Monitors relative position of HUF yields to euro zone

By Krisztina Than

BUDAPEST, Feb 27 (Reuters) - Hungary’s central bank left its main interest rates unchanged at record lows on Tuesday, as expected, holding onto its set of unconventional tools aimed at curbing long-term interest rates.

The National Bank of Hungary, Central Europe’s most dovish central bank, started buying mortgage bonds earlier this year. It also launched new interest rate swaps for banks with the aim of curbing yields on longer-dated bonds.

The bank, which is run by a strong ally of right-wing Prime Minister Viktor Orban who is seeking re-election on April 8, wants to keep borrowing costs low for households and companies for as long as possible.

“The NBH (is) likely to keep money market rates close to zero until 2019 with the help of HUF liquidity tools to avoid FX appreciation as the current account remains in surplus and inflation is unlikely to hit the 3 percent policy target before 2019,” Citigroup analyst Eszter Gargyan said in a note.

All analysts in a Feb 19-21 Reuters poll forecast the bank would keep its base rate at 0.9 percent and overnight deposit rate at -0.15 percent on Tuesday, bucking a global trend of rising interest rates.

The bank is not worried about inflation, which ran at an annual 2.1 percent in January, below its 3 percent target, which has a one percent tolerance range on either side.

At its January meeting, the rate-setting Monetary Council said it would “ensure the persistence of loose monetary conditions over a prolonged period by using the extended set of monetary policy instruments”.

These instruments include interest rate swaps (IRS) offered to commercial banks, which aim to curb a rise in Hungarian long-term yields. Hungarian yields have increased in the past few weeks tracking a rise in core market yields.

“Although we do not expect the NBH to increase the size of the IRS auctions (HUF 300 bln quarterly), the central bank may remain on the market at least until end-2018 offering 5Y and 10Y IRS at fixed levels to local banks, which in our view may mute the impacts of rising external yields,” Citigroup’s Gargyan said.

The forint had eased to 313.90 versus the euro by Tuesday from 310 at the time of the last rate meeting in January, driven by global risk aversion and anticipation of loose monetary policy in Hungary. (Reporting by Krisztina Than; Editing by Catherine Evans)

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