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Hungary's central bank launches tool to drain liquidity after ending rate hikes

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BUDAPEST, Oct 5 (Reuters) - Hungary's central bank accepted 2.093 trillion forints ($4.90 billion) worth of bids from banks at its first floating-rate two-month deposit tender on Wednesday as part of its efforts to drain forint liquidity and tighten monetary conditions further.

The National Bank of Hungary (NBH), which ended its cycle of rate hikes last month taking the base rate to 13%, has said it would deploy an array of tools to tighten liquidity conditions from this month, including the new deposit instrument .

"With today's deposit tender, the NBH starts a marked tightening in liquidity and thus continues monetary tightening," the bank said in a statement, adding it would hold a similar deposit tender next Wednesday.

The bank said its tightening drive could drain liquidity faster than previously expected.

The forint , which has been central Europe's worst performing currency this year, sliding over 12% versus the euro, firmed to 421 from around 423 after the tender, moving away from record lows at 426 hit on Monday. It has been pressured by a surging dollar and the Hungarian economy's vulnerabilities, such as a widening current account deficit.

The central bank has also raised commercial banks' required reserve ratio and on Thursday will hold a new discount bill auction to drain liquidity.

Some analysts said the sudden halt to rate hikes last month was premature, with inflation in double-digits and on the rise, and considering Hungary's widening current account deficit due to surging energy import costs.

Bank of America analysts said this left the forint more vulnerable in the current fragile global environment.

"But in the coming weeks, the central bank is committed to squeeze liquidity to bring short-end rates higher. This, together with the government's efforts to get a deal with the EU (on funding) before year-end, could bring some near-term relief to the HUF," they added in a note on Monday.

"For a sustainable turnaround, we need to see an improvement in the balance of payments. If liquidity measures fail to support the HUF, rate hikes will be back."

On Monday, Hungary also announced it had reached an agreement to defer payments to Russia's Gazprom (GAZP.MM) for winter gas supply, a move that analysts said could ease its short-term external financing needs.

($1 = 427.05 forints)

Reporting by Krisztina Than and Gergely Szakacs Editing by Mark Potter
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