Hungary's central bank holds rates at 2.1pc

BUDAPEST: Hungary's central bank left interest rates unchanged at 2.1 percent on Tuesday in line with its guidance that borrowing costs should remain at a record low through next year to boost the economy.

The bank, led by a close ally of Prime Minister Viktor Orban, has slashed borrowing costs from a peak of 7 percent in 2012. Rates have been on hold at 2.1 percent since the bank made a last, 20 basis point cut in July.

Governor Gyorgy Matolcsy said after the July meeting that rates would remain unchanged until the end of next year.

In a Reuters poll, taken Sept. 16-18, all 19 analysts surveyed said the bank would hold fire on Tuesday. All 18 analysts who replied to a question on future decisions also said rates would remain unchanged for the remainder of this year.

However, some market players are still speculating that the Hungarian bank could resume cutting interest rates in coming months, especially if regional peer Poland cuts later this week to help its economy.

Poland's main rate now stands at 2.5 percent, above junk-rated Hungary's 2.1 percent base rate.

"We are curious to see whether the statement (after today's meeting) contains a shift towards softer monetary policy," MKB Bank economist Zsolt Kondrat said in a note.

The bank's Monetary Council will release its statement at 1300 GMT, when the bank is also expected to publish fresh inflation forecasts from its quarterly report.

With annual inflation running at 0.2 percent in August, the bank can afford to keep borrowing costs low, especially with the European Central Bank also loosening policy.

Hungary's growth surprised on the upside in the second quarter, when the economy expanded 3.9 percent year-on-year. But growth is expected to slow next year when Hungary will receive less in European Union development funds.

A slowdown in the euro zone is also seen as a risk to Hungary's export-driven growth.

One constraint on loosening monetary policy further is a potential weakening of the forint as Hungary enacts legislation that will put a further substantial burden on its heavily-taxed banks.

The law, which parliament is expected to pass on Wednesday, will force banks to refund customers for overcharging on loans, which could cost the sector more than 3 billion euros ($3.9 billion).