BUDAPEST/PRAGUE: Expectations for some monetary tightening in Central Europe helped the mid-yield on the Czech two-year government bond rise above zero on Tuesday for the first time in more than a year, while the Romanian leu traded near six-week highs.
After years in which interest rates trended downwards across the region, policy divisions are starting to emerge, with a rebound in inflation becoming a worry for central banks in the Czech Republic and Romania.
Romania's central bank is expected to keep its main interest rate on hold at a record low 1.75 percent at its meeting on Tuesday, but the bank's rhetoric could turn more hawkish.
There are also some expectations that the bank could narrow its standing facilities corridor by lifting the interest rate on its deposit facility, which would amount to a policy tightening.
ING analysts said in a note that any disappointment on that front could weigh on the leu, which reached six-week highs against the euro late on Monday and traded near that level on Tuesday, at 4.5855 at 0859 GMT.
The currency has been buoyed by a rise in interbank interest rates to their highest levels since late 2014 in recent days.
Prime Minister Mihai Tudose criticised the central bank on Friday for allowing the rise, but it continued this week. The ask yield on the three-month interbank rate rose to 1.8 percent, exceeding the central bank's main rate.
"We look for the deposit facility hike at 7 November meeting, after the 26 October ECB meeting, but given the recent weakening pressure on the RON (leu), we attach a 30 percent probability for NBR to frontload this decision," the ING analysts said.
Five out of eight analysts in a Reuters poll last month projected a first hike in the Romanian central bank's main interest rate by the end of the first quarter of 2018.
Among European Union countries, so far only the Czech central bank has followed the US Federal Reserve in hiking borrowing costs, lifting its main rate in early August.
Expectations for another hike in November have been buoying Czech debt yields and helped the crown strengthen above the 26 psychological line against the euro.
It traded at 25.942 on Tuesday.
"We are close (to 25.900) but we have bounced back already three times so far but every time above 26.000," one dealer said. "As we are below now and as long as we stay here for a few days I think we can test that level but I don't think it'll be a massive break."
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