Hungary's central bank 'could fine-tune monetary easing toolkit'

BUDAPEST: Hungary's central bank could "fine-tune" its monetary easing toolkit in December to ease policy due to downward risks to the inflation and economic growth outlook, a senior official at the bank told Reuters on Wednesday.

The bank will discuss its quarterly economic forecasts on Dec. 15. Figures show inflation may rise to its 3 percent target later than the second half of 2017 projected in the previous report, Managing Director Barnabas Virag said.

Virag, who is not a rate-setter, said the central bank had non-conventional monetary easing tools to use even if it ended its interest rate cutting cycle in July and projects that its record low 1.35 percent base rate could stay flat for years.

Next month the bank could consider changes in its "self-financing programme," which aims to channel commercial banks' funds into government debt from central bank deposit facilities.

"Regarding long-term interest rates and yields (in markets), there is significant further room for monetary easing if necessary," he told Reuters, adding the bank had shifted its focus to targeted unconventional easing tools rather than the base rate.

If the bank finds later that further easing is needed to reach its inflation target and provide a boost to the slowing economy, it could also launch new targeted unconventional tools, he added, without elaborating.

In its September forecasts, the bank saw a rise in average inflation to 1.9 percent in 2016 from a flat rate this year, and a slowdown in economic growth to 2.5 percent from 3.2 percent.

Virag said the key factors pointing to lower inflation included a decline in crude and raw material prices in forints and a stronger forint than assumed in the September forecasts. "We need an exchange rate level which ensures that 3 percent inflation can be achieved in a sustainable way on the monetary policy horizon," he said, declining to specify an exchange rate level. The bank has said it does not have an exchange rate target.

The forint traded around 312.10 against the euro at 1348 GMT, near its average rate of the past six months.

The bank has adopted more pro-growth policies since Prime Minister Viktor Orban's ally, Gyorgy Matolcsy, became its governor in 2013. On top of slashing interest rates it launched programmes including cheap loan schemes to revive sluggish corporate lending.

Virag said a fall in long-term interest rates could encourage investments and consumption and weaken the forint.

Hungarian real interest rates could stay negative for years, as low as 1.5 percent, a natural phenomenon after the 2008-2009 global crisis, he said. "Sustainable growth makes price stability sustainable in the medium- and long-term, too," he said.