United Kingdom

Marton Dunai

CEE MARKETS 2-Forint slides as central bank tightening is one-off

4:01pm GMT

* Forint underperforms as c.bank adopts cautious approach * NBH increased o/n deposit rate, announced liquidity cut * Hungarian bonds tread water after rally, IRS tad lower By Sandor Peto and Marton Dunai BUDAPEST, March 26 The forint eased close to a percent versus the euro after the Hungarian central bank (NBH) said the move to tighten monetary conditions in its meeting on Tuesday was a one-off, and will be followed by new steps only if inflation trends justify it. Hungarian government bond and swap yields and forward rate agreements fell, reflecting fading expectations for further interest rate increases. The NBH has been regarded as one of the most dovish central banks this decade, but started to gradually shift towards more hawkish rhetoric last year. Its main interest rate is still at a record low and real interest rates in Hungarian markets are among the lowest in the world, pushed deep into negative by a rise in inflation. The forint traded at 318.8 versus the euro at 1449 GMT, down 0.8 percent. Despite its biggest daily fall in almost three years, the forint has stayed the region's best-performing currency this year, with 0.7 percent rise from 2018. In the two months following mid-January, it had surged almost 4 percent to 11-month highs at 312.65 versus the euro. It has been boosted by expectations a rise in the NBH's core inflation measures above 3 percent, the midpoint of its target range, would prompt monetary tightening. Those expectations were knocked back in the past week by global economic growth worries, expectations for a Federal Reserve rate cut and a delay in euro zone monetary tightening. Other Central European currencies changed little. Hungarian government bond yields fell as markets priced out further rate hikes. "The market's assessment is that this rate hike was a one-off," one Budapest-based fixed income trader said. "The market got what it had expected, without a credibility loss, and the fall of yields reflects that. Decline remains the trend now," the trader added. CIB Bank analyst Sandor Jobbagy said a cut in the liquidity provided by the bank to markets via its fx swaps, also announced on Tuesday, was more important than the symbolic interest rate adjustment, which affected only the overnight rate. "This was the first rate hike since December 2011, but the higher overnight rate is still below recent market rates therefore the liquidity measures will have a more significant market effect," Jobbagy wrote in a note to clients. "That said the interest rate step was symbolic regarding normalisation of monetary policy and the beginning of tightening, therefore the significance of the higher overnight rate outstrips the unchanged base rate." CEE SNAPSHOT AT MARKETS 1549 CET CURRENCI ES Latest Previous Daily Change bid close change in 2019 Czech 25.7570 25.7510 -0.02% -0.19% crown Hungary 318.8000 316.1500 -0.83% +0.72% forint Polish 4.2924 4.2927 +0.01% -0.07% zloty Romanian 4.7565 4.7556 -0.02% -2.15% leu Croatian 7.4200 7.4175 -0.03% -0.13% kuna Serbian 117.9000 117.9800 +0.07% +0.34% dinar Note: calculated from 1800 CET daily change Latest Previous Daily Change close change in 2019 Prague 1076.97 1076.330 +0.06% +9.16% 0 Budapest 41856.84 41605.17 +0.60% +6.94% Warsaw 2318.22 2312.79 +0.23% +1.83% Bucharest 8049.90 7954.29 +1.20% +9.02% Ljubljana 874.64 871.83 +0.32% +8.75% Zagreb 1791.58 1793.30 -0.10% +2.45% Belgrade <.BELEX15 730.05 730.16 -0.02% -4.15% > Sofia 582.48 582.80 -0.05% -2.02% BONDS Yield Yield Spread Daily (bid) change vs Bund change in Czech spread Republic 2-year <CZ2YT=RR 1.8470 -0.0790 +241bps -9bps > 5-year <CZ5YT=RR 1.8160 0.0320 +224bps +3bps > 10-year <CZ10YT=R 1.8680 0.0170 +189bps +2bps R> Poland 2-year <PL2YT=RR 1.6760 -0.0810 +223bps -9bps > 5-year <PL5YT=RR 2.2000 -0.0010 +263bps -1bps > 10-year <PL10YT=R 2.8600 0.0040 +288bps +0bps R> FORWARD RATE AGREEMEN T 3x6 6x9 9x12 3M interban k Czech Rep < 2.12 2.15 2.14 2.02 PRIBOR=> Hungary < 0.34 0.48 0.56 0.13 BUBOR=> Poland < 1.73 1.73 1.74 1.72 WIBOR=> Note: FRA are for ask prices quotes ************************************************** ************ (Reporting by Sandor Peto; Editing by Mark Potter and Ed Osmond)

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