BUDAPEST: Hungary's central bank kept its base rate on hold on Tuesday and said it would ease monetary conditions further by squeezing out at least 200-400 billion forints from its main deposit tool into the economy by year-end.
The bank, under Governor Gyorgy Matolcsy, an ally of Prime Minister Viktor Orban, wants private banks to offer cheaper loans to households and firms and to buy government debt instead to boost growth and reduce debt-financing costs.
The National Bank of Hungary said it would cap funds placed by commercial banks in its main 3-month deposit tool at 900 billion forints ($3.26 billion) by the end of this year, and that this should drive down interbank rates and debt yields.
"The purpose of today's decision is to stimulate the interbank market further and to facilitate the targeted easing of monetary conditions by way of unconventional instrument", the bank said in a statement.
The bank, which had stopped its rate cuts earlier this year, said it was ready to apply stronger limits to its main three-month deposit next year if reaching its 3 percent inflation target made this necessary. "The NBH is designing fine-tuning instruments to offset potential considerable and persistent liquidity shocks," it added.
The Monetary Council will decide on operative details of the fine-tuning instruments in October. These instruments could include, if needed, forint swaps provided by the central bank.
A surprise credit rating upgrade by Standard & Poor's on Friday has bolstered Hungary's forint and demand for government debt.
A Reuters poll suggested the bank could cap the funds in its deposit tool at around 1 trillion forints ($3.6 billion) by the end of 2016.
The central bank expects that a cut in liquidity in the deposit tool would reduce borrowing costs by pushing down the BUBOR interbank rate.
It flagged an end to rate cuts in May after slashing its base rate to 0.9 percent from a 2012 peak of 7 percent.
"The central bank is migrating to a system whereby the policy rate will be only a reference in a rates corridor framework," Citibank said in a note.
Analysts' median forecasts showed the base rate could stay on hold throughout this year and next.
With annual inflation running at -0.1 percent in August, the bank is focused on boosting economic growth, which picked up to an annual 2.6 percent in the second quarter but could still be below last year's full-year growth of around 3 percent.
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