BUDAPEST: Hungary's central bank kept its interest rates at record lows on Tuesday despite a broad sell-off in emerging markets which has also lifted Hungarian yields and weakened the forint this month.
With inflation remaining well below its 3 percent policy target, the National Bank of Hungary, one of Central Europe's most dovish central banks, is seeking to boost economic growth with a flood of cheap loans to households and companies.
A surge in global and Hungarian debt yields and a weakening of the forint since the bank's previous meeting in April are unlikely to prompt policymakers to change that stance, analysts said before the meeting.
However, they said investors will be looking for clues in the bank's statement at 1300 GMT about the forint's falls, and especially the rise in yields which many market participants believe has been faster than the bank wanted.
The 10-year Hungarian bond yield has climbed around 60 basis points to 3.18 percent this month.
"The MPC statement should reveal some reaction to the recent HUF weakness and uptick in Bubor," Bank America Merrill Lynch said in a note. Bubor is the Budapest interbank rate.
"Admittedly, market developments have been mostly externally driven, but the investors are likely looking for some reassurance from the central bank about its commitment to keep monetary conditions loose across the yield curve."
A Reuters poll last week predicted that the bank would keep its base rate on hold at 0.9 percent this year and next but may start to increase its overnight deposit rate in 2019.
The three-month Bubor is seen edging up to 20 basis points over the next 12 months from Tuesday's 10 basis points.
While the Czech and Romanian central banks have started to lift interest rates to defend inflation goals, Hungary and Poland have signalled that rates could stay on hold for years.
Annual headline inflation ran at 2.3 percent in April, below the Hungarian bank's 3 percent policy target, which has a tolerance band of a percentage point on both sides. The bank expects inflation to reach its target in a sustainable way by the middle of 2019.
The economy grew at a robust rate of 4.4 percent in the first quarter in annual terms, which suits the policies of right-wing Prime Minister Viktor Orban, re-elected for another four years last month.
The forint, which had touched a new 23-month low to the euro on Monday, traded at 317.40 after the rate decision, unchanged from levels before the announcement.
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