Hungarian central bank seen holding base rate, cutting 3-month depos

BUDAPEST: Hungary's central bank will keep its base rate unchanged but could announce a further cut in its 3-month deposits next Tuesday in order to ease monetary conditions and drive interbank rates lower, a Reuters poll showed on Wednesday.

All 20 analysts said in a Dec. 12-14 Reuters poll that the bank would keep its base rate on hold at 0.9 percent at its Dec. 20 meeting. The median forecasts showed the policy rate could stay on hold throughout this year and next year, and could rise to 1.3 percent by end-2018.

The bank ended cuts in its main base rate in May. Instead, it has been using unconventional tools to stimulate the economy and push market interest rates lower, consistent with its aims of increasing liquidity in interbank markets and lowering borrowing costs for businesses and households.

Sticking to this stance, at its November meeting the bank kept its base rate unchanged. But it cut its overnight lending rate for the second month in a row.

Now the top of its interest rate corridor is at 0.9 percent, equal to the base rate, so markets are closely watching to see if the bank cuts its overnight deposit rate further into negative territory from -0.05 percent, or imposes a further cap on 3-month deposits.

According to the median estimate of nine analysts who responded to this question in the poll, funds in the 3-month deposit could be reduced to about 700 billion forints ($2.37 billion) by March, from around 936.8 billion at the end of November.

Citibank analyst Eszter Gargyan said the bank was unlikely to cut the base rate, but could compress interbank rates further.

"The o/n deposit rate becomes more important as the NBH is gradually squeezing out liquidity from the 3-month deposit instrument, besides intervening with FX swaps to add temporary HUF liquidity and thereby pushing interbank rates lower," she in a note.

But analysts noted that considering the government's fiscal loosening and an expected pickup in the flows of European Union funds, liquidity in the banking system would increase in coming months.

At the same time, the forint has weakened due to global uncertainties, which means the central bank is actually under no pressure to ease policy further.

Peter Virovacz, an analyst at ING Bank said he expected the central bank's end-year cap on three-month deposits to remain unchanged at 900 billion forints at the December meeting.