Hungary leaves rates steady ahead of expected inflation overshoot

BUDAPEST: The National Bank of Hungary (NBH) left interest rates unchanged on Tuesday, in line with analyst forecasts, ahead of an expected overshoot of the bank's inflation target and high market volatility amid the coronavirus pandemic.

The NBH left its base rate at 0.6% and the overnight deposit rate at -0.05%, both in line with the unanimous forecast of economists in a Reuters poll.

At 1301 GMT, the forint traded at one-week-lows of 358.5 versus the euro, unchanged from levels just before the announcement.

Deputy Governor Barnabas Virag said this month that the NBH should stick to its cautious monetary policy stance because of an expected rise in inflation and volatility in risk appetite.

Hungary last week became the first European Union state to buy Russia's Sputnik V COVID-19 vaccine. Prime Minister Viktor Orban's government aims to accelerate inoculations to be able to revive the economy before national elections next year.

Analysts see the economy growing by 4.05% this year and 4.45% in 2022 after last year's pandemic-induced crash.

In comments that buoyed the forint, Orban's senior economic aide, Marton Nagy, last week projected growth of 5% to 6% this year and possibly 6% to 7% in 2022.

Goldman Sachs economists said they expected the central bank to reiterate its 'steady-as-you-go' tone.

Rate-setters will emphasise "two-sided risks to inflation, with relatively weak domestic and external demand side pressures offset by inflationary risks from the exchange rate," the economists said in a note.

A majority of economists also expect the NBH to leave its one-week deposit rate unchanged at 0.75% at least until the end of the first quarter after September's 15-basis-point increase.

"The Monetary Council has repeatedly flagged a possible increase in market risk aversion (read: a possible weakening of the HUF) as the 'greatest risk' for the CPI outlook," Societe Generale economist Marek Drimal said in a note.

"We thus expect it to keep the (one-week deposit rate) ... at 0.75% well into 2Q21."