December 19, 2017 / 2:48 PM / 3 months ago

UPDATE 2-Hungarian central bank keeps rates unchanged, mortgage bond buying in focus

(Updates with central bank comments)

* Bank leaves base rate at 0.9 pct as expected

* Overnight deposit and lending rates also unchanged

* Bank will buy mortgage bonds from 2018

* Bank in easing mode, does not worry about inflation

* Sees GDP growth slowing in 2019 and 2020

By Krisztina Than and Gergely Szakacs

BUDAPEST, Dec 19 (Reuters) - Hungary’s central bank left all its main interest rates unchanged at record lows on Tuesday, hanging on to its unconventional stimulus programmes aimed at curbing long-term interest rates.

The bank announced last month that it would start buying mortgage bonds from 2018. It wants to push yields lower on longer-dated government bonds and encourage borrowers to choose fixed-rate housing loans.

Run by 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 have started tightening.

The Monetary Council said it expected inflation to reach its target of 3 percent plus or minus 1 percentage point by mid-2019, for which loose monetary conditions were necessary.

“The Council will closely monitor developments in monetary conditions and will ensure the persistence of loose monetary conditions over a prolonged period by using the extended set of monetary policy instruments,” it said in a statement. The Council said that after several rounds of talks with banks, it would decide on the operational details of its mortgage bond programme and new interest rate swaps announced last month until Dec. 22 and will issue a separate statement.

In its new inflation report, the bank left its inflation forecasts unchanged for 2018 and 2019. However, it raised its 2018 GDP projection to 3.9 percent from 3.7 percent.

“GDP growth will approach 4 percent in 2017 and 2018, then it will slow down from 2019 onwards,” the bank said, forecasting only 2.7 percent growth for 2020.

The decision to keep the base rate at 0.9 percent was in line with the unanimous forecast of 18 analysts in a Reuters poll last week.

Most analysts do not see a change in the base rate until at least 2020.

The forint traded at 313.30 after the bank’s meeting, unchanged from levels before the announcement.

The bank is bucking a global tendency of raising interest rates, without worrying about inflation, which picked up to 2.5 percent in November from 2.2 percent in October.

It is still below the bank’s 3 percent target, which has a 1 percentage point tolerance range on either side.

“We believe in the lack of further wage acceleration ...or external price shocks, inflation is likely to remain below the 4 percent upper band of the NBH’s target even in 2019, allowing policy makers to stick to their ultra-dovish stance until the ECB begins to hike rates,” Citibank analyst Eszter Gargyan said in a recent note.

Reporting by Krisztina Than; Editing by Jeremy Gaunt

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