BUDAPEST/WARSAW: Government bond prices surged on Thursday after a batch of data showed economic growth was slowing in both the Central European region and the euro zone.
In Poland, the region's biggest economy by far, economic reports fuelled to concern that deflation may worsen beyond 2014, making it more likely the central bank will cut rates.
"The rates (of 2.5 percent) as high as we presently have may deepen deflation," Polish central bank rate-setter Elzbieta Chojna-Duch told Reuters.
On Wednesday, Poland reported a 0.2 percent annual drop in consumer prices in July, its first decline in prices since the early 1970s. Data released on Thursday showed economic growth slowed to an annual 3.2 percent in the second quarter from 3.4 percent in the first quarter.
With both lower consumer prices and lower interest rates looking more likely, Poland's 5-year benchmark bond yield was bid at 2.71 percent, down 10 basis point after the figures.
"We see an increased demand for Polish bonds after yesterday's deflation reading, both from local and foreign players. The GDP's slowdown in Q2 is an another argument for rate cuts, even though that release was in line with expectations," said Henryk Sulek, senior bond dealer at Raiffeisen Polbank.
The zloty, which in theory should weaken if interest rates are about to fall, gained 0.4 percent against the euro by 1041 GMT. Dealers said investors were buying zloty so they could purchase Polish bonds.
UKRAINE REMAINS A WORRY
Poland has been the most affected country in the region the crisis in neighbouring Ukraine. That has slowed its economic growth and bolstered arguments that the Polish central bank should resume the rate cuts it ended last year.
The economic reports from the past week look more ominous because they haven't reflected the face-off between Moscow and the West over Ukraine. The United States and European Union have imposed sanctions on Russia, which retaliated with sanctions of its own.
Stocks were mixed in the region on Thursday. Currencies recovered from figures showing economic growth slowed to an annual 2.6 percent in the Czech Republic and 1.2 percent in Romania. The Czech crown and the Romanian leu flattened against the euro.
The forint firmed 0.4 percent after Hungary reported a surprise pick-up in annual GDP growth to 3.9 percent in the second quarter from 3.5 percent in the first quarter.
Earlier this week, a profit warning by OTP, Hungary's biggest bank, had weighed on the currency. A rebound of the bond market helped it on Thursday.
"Short-covering pushed down bond yields (by about 20 basis points from Wednesday's fixing)," one Budapest-based fixed income trader said, adding that the move reflected a fall in Polish and German yields due to Thursday's weak economic output data.
Hungary's 5-year benchmark bond yield fell 21 basis points to 3.76 percent. Romania's corresponding bond yield was bid at 3.52 percent, down 8 basis points.
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