By Sandor Peto
BUDAPEST (Reuters) - Hungary's central bank will keep its base interest rate on hold for the rest of 2019, preferring to tackle rising inflation by letting interbank rates rise, a Reuters poll ahead of its next policy meeting on Tuesday found.
The National Bank of Hungary (NBH) expects inflation to drop soon, partly due to sluggish growth in the euro zone, the country's main trading partner.
But headline inflation reached 3.9%, near the top of the NBH's 2-4% target range, in April and the economy was the European Union's fastest growing in the first quarter at 5.3%.
"Domestic demand is strong and will remain strong next year," said K&H Bank analyst David Nemeth. "Inflation pressure is present and will be present. Inflation is above 3 percent, so the central bank will need kind of an adjustment."
All 19 analysts polled from May 20-22 said the bank would hold its base rate at 0.9%, the lowest in the region, on Tuesday.
The median forecast was for the rate to remain at that level for the rest of 2019, then rising to 1.2% next year and 1.4% in 2021.
But the survey projected a gradual rise in the 3-month BUBOR interbank rate over the coming year, to 0.67% from 0.2%.
The 14 analysts who also gave a forecast for the overnight deposit rate all said that would stay at -0.05% on Tuesday. The poll projected it would nudge up to 0.05% by the end of this year and rise further in 2020 and 2021.
The bank hiked the overnight deposit rate by 10 basis points in March, also announcing a cut in the liquidity it provides to markets via its currency swap tool.
But it called the move a one-off, and said it would make future monetary decisions based on quarterly inflation reports. The next such report is due in June.
The median poll forecasts put inflation at 3.65% in December, 3.2% at the end of 2020, and 3% in the last month of 2021.
Asked to rank the factors the NBH takes into account in its decision-making, the analysts attributed 41% weight to domestic inflation trends, 25% to the European Central Bank's policy outlook and 15% to the forint's exchange rate.
Hungary's currency has hit 9-month lows against the euro in recent days due to the rising inflation and the worsening impact on emerging markets of the U.S.-China trade war.
(Reporting by Sandor Peto; editing by John Stonestreet)