March 29, 2018 / 2:54 PM / 10 months ago

CEE MARKETS-Crown firms after CNB says slow appreciation could lead to faster tightening

    * Czech central bank: rates could rise if crown does not
    * Crown extends gains, other CEE currencies are mixed
    * Hungarian bond auction draws robust demand
    * Romanian central bank chief defends rate hikes under

 (Recasts with Czech central bank decision, comments from Czech,
Polish and Romanian central banks, Hungarian bond auction)
    By Sandor Peto and Marcin Goettig
    BUDAPEST/WARSAW, March 29 (Reuters) - The crown extended its
gains on Thursday after Czech central bank (CNB) Governor Jiri
Rusnok said the pace of policy tightening could speed up if the
currency appreciates too slowly.
    The bank has raised interest rates three times since August
but has paused after inflation dropped below its 2 percent
target and said on Thursday it saw slightly anti-inflationary
risks to its forecast seeing the next hike around the end of
this year.
    Rusnok's comments after a meeting of the CNB rate setting
body were closely watched as a retreat in inflation rates in
most of central Europe in February had led to some expectations
of a shift towards less hawkish rhetoric.
    Rusnok said the board's debate at the meeting was "very
lively" before it voted unanimously to keep rates on hold, in
line with analysts' forecasts.
    The CNB board said it saw an inflationary risk in a possible
slower appreciation of crown against the euro in the quarters
ahead, compared to its forecasts. This, according to Rusnok,
would allow for a faster pace of further interest rate
    The crown firmed 0.2 percent against the euro to
25.406 by 1338 GMT. 
    The yield of 3- and 5-year Czech government bonds,
meanwhile, dropped by 4 basis points, in line with most bond
markets in the region.
    Data released before the CNB meeting showed that the
proportion of foreigners' holding Czech state domestic bonds was
almost steady at 37.72 percent in February, which showed they
were in no rush to close their positions.
    A stronger crown would allow them to take profit on the
large amount of positions they built before the CNB removed a
cap on the currency a year ago.
    Hungarian government bonds also extended their gains
slightly as an auction drew strong demand.
    The Hungarian central bank reiterated this week that it
would continue to fuel demand for long bond maturities by
providing markets with cheap financing through its swap
facilities and by buying mortgage notes.
    The government sold 82 billion forints (323.8 million) worth
of bonds, above its original 53 billion forint offer. The
10-year bond yield was fixed at 2.39 percent, down 2 basis
points from Wednesday. 
    Hungary's and Poland's 10-year yields are expected to rise
by 40-50 basis points in the next 12 months, tracking Bunds and
U.S. yields, according to a new Reuters poll of analysts.

    Poland's 10-year yield dropped 3 basis points to 3.19
percent, after its finance ministry projected a slowdown in debt
issuance and the central bank released the minutes of its last
meeting which contained dovish comments.

    Romania's leu eased 0.1 percent against the euro.
    Romanian Central Bank Governor Mugur Isarescu defended the
rate hikes delivered so far this year at a parliament committee
    "We're between a rock and a hard place," he said. "On the
one hand we are being accused of acting too slowly, and on the
other it has been suggested we hit economic growth in the head
like a ram at the start of the year through rate hikes."
            CEE       SNAPSHOT   AT                         
            MARKETS             1538 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.4060   25.4510    +0.18%    +0.54%
 crown      >                                       
 Hungary    <EURHUF=  312.2000  312.2700    +0.02%    -0.41%
 forint     >                                       
 Polish     <EURPLN=    4.2080    4.2035    -0.11%    -0.75%
 zloty      >                                       
 Romanian   <EURRON=    4.6580    4.6525    -0.12%    +0.47%
 leu        >                                       
 Croatian   <EURHRK=    7.4295    7.4425    +0.17%    +0.01%
 kuna       >                                       
 Serbian    <EURRSD=  118.3500  118.5600    +0.18%    +0.13%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1124.21  1119.050    +0.46%    +4.27%
 Budapest             37314.08  36783.31    +1.44%    -5.24%
 Warsaw                2221.75   2203.70    +0.82%    -9.73%
 Bucharest             8716.73   8726.88    -0.12%   +12.42%
 Ljubljana  <.SBITOP    817.45    821.53    -0.50%    +1.37%
 Zagreb                1807.12   1813.98    -0.38%    -1.94%
 Belgrade   <.BELEX1    748.90    746.10    +0.38%    -1.43%
 Sofia                  647.14    654.09    -1.06%    -4.47%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    0.7740    0.0490   +137bps     +6bps
   5-year   <CZ5YT=R    1.2500   -0.0360   +135bps     -3bps
   10-year  <CZ10YT=    1.8680   -0.0380   +137bps     -4bps
   2-year   <PL2YT=R    1.5100   -0.0090   +211bps     +0bps
   5-year   <PL5YT=R    2.3630   -0.0240   +246bps     -2bps
   10-year  <PL10YT=    3.1920   -0.0270   +269bps     -3bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                0.97      1.07      1.22      0.90
 Hungary                  0.07      0.12      0.19      0.03
 Poland                   1.74      1.75      1.77      1.70
 Note: FRA  are for ask prices                              
 ($1 = 253.2400 forints)

 (Additional reporting by Luiza Ilie in Bucharest
Editing by Edmund Blair and Raissa Kasolowsky)
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