Forint falls as central bank calls inflation risk balanced

BUDAPEST: The forint fell on Thursday after National Bank of Hungary Deputy Governor Marton Nagy said inflation risks were balanced and both monetary tightening and loosening were possible.

The forint traded at 320.5 versus the euro at 1422 GMT.

It was weaker by a third of a percent on the day, off a two-month low reached at 320.89 after the central bank raised its core inflation forecasts.

It has given up almost all its 2019 gains since Tuesday, when the bank delivered its first rate increase since 2011, but dropped its guidance about gradual monetary tightening, sending the forint into its biggest daily decline in years.

Nagy reaffirmed that the rate increase was one-off. He said markets had priced in more rate hikes than justified, and that the bank had no exchange rate target, but "we like exchange rate stability".

A strengthening of the dollar weighed on Central European currencies.

The zloty eased 0.1 percent against the euro. The crown was steady, but trading at 25.78 it remained near Wednesday's six-week low of 25.815.

The Czech central bank left rates unchanged at its meeting on Thursday, as most analysts had expected.

Like the Hungarian central bank, it saw balanced consumer price risks, after calling them inflationary in a previous assessment, mentioning the crown's slower-than-expected firming among upwards risks.

While Nagy did not rule out monetary easing, CNB Governor Jiri Rusnok said it did not seem that the bank would need to consider a rate cut, adding that he still saw chances for either zero or up to two interest rate increases in 2019.

Government bond yields were steady or a shade higher in the region. Euro zone bond prices also slipped after a rally in the past two weeks driven by expectations that a slowing global economy would keep a lid on central bank interest rates

But Hungary again sold more than 100 billion forints worth of bonds at its bi-weekly auctions at yields lower by around 40 basis points from a sale two weeks ago. Yields rose 2 to 3 basis points after the primary sale.

Strong demand for the three benchmark euro-denominated bonds sold by Romania on Wednesday, despite shaky domestic political fundamentals, signals strong appetite for high-yielding investment-grade emerging market debt, Raiffeisen said in a note.

"Our Buy recommendation (for Romanian bonds) stays intact despite relatively large supply this time as global central banks' policies remain conducive for EM bond markets," the note said.