BUDAPEST/PRAGUE: The Czech crown reversed an early strengthening and Hungarian government bonds firmed on Wednesday after the two countries released lower than anticipated inflation figures for April.
Slower inflation in the region reduces the odds that central bank monetary tightening could start any time soon after years of interest rate cuts and measures to boost market liquidity.
The prospect of tightening could support currencies and possibly push government debt prices lower.
After a year of almost unbroken rising, Czech annual inflation dropped to the central bank's (CNB) 2 percent target in April. It was below the analysts' consensus forecast, just like Hungary's figure, which dropped to 2.2 percent from 2.7 percent in March.
A retreat of volatile fuel and food prices caused the slowdown already indicated by Polish data released earlier.
The crown firmed to a one-month high of 26.565 against the euro in early trade, but after the inflation data it sharply retreated.
At 0838 GMT, it traded at 26.677, weaker by 0.14 percent.
"(The data) is an argument for the central bank to not be in a dramatic hurry to hike interest rates in the upcoming months and to stay in the wait-and-see mode for a longer period," Patria Finance economist Jan Bures said.
The slowdown did not affect the core components of inflation, and signs of a pick-up in them in the Czech Republic mean that the CNB will not look at the drop in the headline figure as an unfavourable event, said Radomir Jac, chief economist at General Investments CEE.
"The chance of raising rates in the second half of the year will stay for the CNB board a relevant topic, especially if the crown does not firm from current levels," he said.
The bank said earlier that the likelihood of rate hikes will rise if the crown does not firm from 27, the level of a cap removed by the CNB 5 weeks ago.
The forint ignored the inflation data and firmed 0.1 percent to 311.29. A dealer said it was likely to stay in its recent narrow ranges of 311-312.
Hungarian government bond yields, however, dropped, mainly at the long end of the curve, with 10-year papers trading at 3.08 percent, down 7 basis points from Tuesday's fixing.
"If inflation remains low, it is possible that the central bank rate hikes expected for next year will be delayed to 2019," one trader said.
Economic activity indicators released in the region recently have been robust. Data released on Wednesday showed 10.9 percent annual surge in Czech industrial output in March, and 0.8 percent rise in Slovenia.
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