September 19, 2017 / 12:14 PM / in a month

UPDATE 2-Hungary flags more easing, cuts deposit rate

(Adds comments by central bank, market impact)

* Overnight rate lowered by 10 basis points to -0.15 percent

* Base rate unchanged as expected

* To cap 3-month deposits at 75 billion forints

* To boost usage of swap tools

* Forint firms after rate cut

By Gergely Szakacs and Krisztina Than

BUDAPEST, Sept 19 (Reuters) - Hungary’s central bank cut its overnight deposit rate and announced further steps to ease monetary conditions on Tuesday, seeking to boost stubbornly below-target inflation.

The bank also said it was ready to loosen monetary policy further with unconventional, targeted tools in order to drive longer government bond yields lower as soon as possible.

In the meantime, it cut the deposit rate by 10 basis point to -0.15 percent.

“What is important for the Monetary Council is that it wants to keep monetary conditions loose,” Deputy Governor Marton Nagy told a news conference after the meeting. “The central bank is not afraid to act ... and has a range of tools to maintain loose monetary conditions.”

He said the overnight deposit rate cut was warranted because of a repeated delay in meeting the inflation target. The bank now sees inflation only reaching its target of 3 percent in a sustained way in the middle of 2019.

The bank left its main base rate on hold at a record-low 0.9 percent, in line with analyst forecasts in a Reuters poll last week.

The rate-setting Council said that it would squeeze more funds out of its 3-month deposit tool by the end of the year as part of its attempts to boost liquidity and drive market rates lower. It will cap deposits at 75 billion forints by the end of the year, below analysts’ expectation for 150 billion.

In addition, the bank will also boost the stock of its swap facilities, which pump forint liquidity into the market.

“The objective... is to provide the loosening effect up to the longest possible section of the yield curve as soon as possible,” the council added.

TO DRIVE DOWN LONGER BOND YIELDS

Nagy said the bank wanted to flatten the yield curve.

The bank will monitor the impact of Tuesday’s overnight deposit rate cut on longer yields and take further steps if needed to reduce them, Nagy added.

“The question is what we will see on the yield curve in the coming days, not just on the short end, but also on longer maturities,” Nagy said.

He said the bank will be ready to launch new tools if the current loose monetary conditions change and longer-dated yields fail to track a decline on shorter maturities.

He declined comment on the possible new tools but said further measures were already in the works.

The forint traded at 308.33 versus the euro, stronger than 309.35 just before the announcement. It has lost about 2 percent of its value since the central bank raised the prospect of further easing last month.

The bank targets inflation at 3 percent with a tolerance band of one percentage point on both sides. In its new inflation report released on Tuesday, the bank forecast annual average inflation at percent 2.4 this year and 2.5 percent in 2018. ($1 = 257.1500 forints)

Writing by Krisztina Than Editing and Graphic by Jeremy Gaunt

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