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UPDATE 2-Hungary cbank holds rates, hints at future cut

Published 05/25/2009, 10:49 AM
EUR/HUF
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ERST
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TGT
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* Hungary cbank keeps rates on hold at 9.5 pct as expected

* Cbank says rate cut could come if stability lasts

* Cbank sees 6.7 pct recession in 2009, rebound in 2011

* Cbank raises inflation fcasts, says CPI goal within reach

(Adds cbank comments, detail)

By Gergely Szakacs and Balazs Koranyi

BUDAPEST, May 25 (Reuters) - Hungary's central bank (NBH) left rates unchanged at 9.5 percent on Monday and said a cut could come if sentiment improves in a lasting way and if easing does not threaten financial stability.

The bank has also sharply revised its economic projections, and now sees the economy contracting by 6.7 percent this year, in line with the government's latest figure and said the economy could recover by 2011 when growth could reach 3.4 percent.

This is the fourth month running that interest rates were kept on hold in Hungary due to the bank's concerns about financial stability, despite a much deeper than expected economic recession.

Governor Andras Simor said the Council discussed two options, holding rates and cutting them by 50 basis points, and the "hold" decision was passed with a substantial majority.

"The base rate may be reduced ... in the coming months if the recent improvement in sentiment continues," the Council said in a statement, adding that a key condition was that policy easing must not threaten financial stability.

Simor told a news conference the economy would rebound from its deep recession in 2011 mainly due to an expected recovery in key export markets.

"The Hungarian economy will recover from a very deep recession and after that it's easier to reach rapid growth," he said.

Analysts said the bank would likely remain cautious, monitoring risks to financial stability after sharp falls of the forint to record lows versus the euro in March.

The forint has firmed significantly since the bank's last April rate-setting meeting, as hopes for a global recovery helped emerging market assets, but its stability is still seen as fragile.

"The bank is cautious because of high volatility in the forint's exchange rate in the recent period," said Orsolya Nyeste, analyst at Erste Bank. "If risk appetite (in global markets) rises in the second half (of 2009) as expected, a rate reduction can come," she added.

In a Reuters poll last week 19 of 21 analysts predicted Monday's unchanged decision but the median forecast for rates at the year-end was 8.5 percent .

INFLATION RISE SEEN TEMPORARY

The bank said it did not see significant inflation risks despite a planned rise in the main value-added tax rate to 25 percent from 20 percent in July which is part of a government package of spending cuts and tax changes to help the economy.

Simor said the bank expected to achieve its medium-term inflation target by the second half of next year despite the tax hike.

"Based on our current inflation forecast apparently we can look through this tax hike," Simor told the news conference.

"Even with the tax hike, (inflation) will be under the target from the second half of 2010," he added.

The bank said Hungary's risk assessment could improve in the long term due to the government's measures which were passed in parliament earlier this month and which are expected to keep the budget deficit at 3.9 percent of GDP this year.

"A clear change over the past month was the government's new programme ... Over the short term, they (the measures) cut demand and reduce growth further. But in the long term, the measures could accomplish a great deal," Simor said.

"As a result, we think that in the longer term, it's possible that Hungary's risk assessment will improve." (Reporting by Krisztina Than; editing by David Stamp and Andy Bruce)

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