Forint firms on bets for hawkish central bank hints

BUDAPEST: Central European currencies firmed slightly on Tuesday amid expectations that the Hungarian central bank (NBH) will start monetary tightening at its meeting.

The forint, the zloty and the leu firmed less than 0.1 percent against the euro, while the MSCI emerging market currency index dropped slightly.

"The zloty may also be affected by the forint's reaction to Hungarian central bank decision, which could tighten its rhetoric," Warsaw-based Santander bank analysts said in a note.

The NBH, which has kept interest rates at record lows since 2016, is "in a normalization phase", Governor Gyorgy Matolcsy said at a parliamentary committee hearing on Tuesday.

His comments, however, provided little guidance over the bank's decision at Tuesday's meeting, dealers said.

The forint, at 317.65, traded on the firm side of its average in the past 30 days since deputy central bank governor Marton Nagy talked it up, saying 3 percent or higher tax-adjusted core inflation could trigger monetary tightening.

The core inflation measure ticked up to 3 percent in January, but all analysts in a Reuters poll last week predicted no change in the bank's base rate 0.9 percent base rate and -0.15 percent overnight deposit rate for Tuesday's meeting.

Some analysts did not rule out a rise in the overnight rate or a cut in the bank's fx swap facility, through which it provides forint liquidity to the market.

But the dominant expectations is no change, dealers said.

"FRAs (forward rate agreements) and 2-year IRSs (interest rate swaps) moved higher by a few basis points, but in spot government bond yields there is no change," one Budapest-based fixed income trader said.

Hungary's 10-year government bonds traded at a yield of 2.66 percent, flat from Monday's fixing.

Poland's corresponding yield dropped by 1 basis point to 2.78 percent, after Monday's 13 basis-point jump as the ruling Law and Justice party (PiS), preparing for elections, promised a big increase in public spending.

A retreat of yields is supported by expectations that Britain's exit from the European Union (Brexit), due on March 29, will be postponed, Santander said.

Tomas Holub, rate setter at the Czech central bank which will meet on March 28, said on Tuesday that Brexit without a deal would have both inflationary and anti-inflationary effects, and the bank should wait to see how that plays out.

The comments discouraged bets for a hike at the March meeting. The crown eased 0.1 percent to 25.66 versus the euro.

Central European stocks indices tracked Asian and Western European peers lower, with Budapest shedding 0.9 percent.