BUDAPEST: The Hungarian forint led gains in the region on Tuesday as some investors were betting on the central bank hiking its benchmark interest rate more than previously expected at its meeting later in the day.
According to a Reuters poll of analysts, the NBH is expected to raise its base rate by 15 basis points to 1.8%. The bank will announce its decision at 1200 GMT with a statement to follow at 1300 GMT.
The forint firmed 0.51% to 360.00 per euro after falling to its weakest level since July in the previous session.
Some market participants expect a bigger rate hike than 15 basis points, which is supporting the forint, two FX traders in Budapest said.
Currencies muted as rate hike expectations unable to lift them
"Analysts now agree that high inflation is here to stay, and the market has started to price in that something needs to happen," one trader said.
Commerzbank wrote that a 15 basis point hike is priced in and is "unlikely to provide much support for the forint."
The currency has given up nearly all its gains since the National Bank of Hungary (NBH) started tightening in June as it slowed the pace of rate rises last month despite raising its inflation forecasts.
Prime Minister Viktor Orban's aide Marton Nagy said on Tuesday Hungary's central bank has launched a "half-hearted" tightening cycle amid a massive fiscal impulse from the government, resulting in a policy divergence.
A surge in price growth in eastern Europe has opened a rift between central banks that have launched rate hikes to battle inflation and populist governments trying to defend a strong economic recovery.
Hungarian government bond yields were stable on Tuesday after a jump at the long end of the curve in the previous session when yields rose about 15 basis points along with yields in Poland.
"This is not unique to Hungary, there has been a selloff in regional papers recently as inflation expectations rise," a fixed-income trader in Budapest said.
The Polish zloty gained as risk appetite increased globally, although that "will be balanced by the persistent political risk on the Polish currency," Bank Millennium wrote in a note.
A row between Warsaw and Brussels escalated this month when the Polish Constitutional Tribunal ruled that parts of the European treaties were incompatible with the constitution.
The zloty was up 0.4% and trading at 4.5716 per euro.
The Czech crown edged up 0.09%, stuck near the 25.4 mark. Markets are pricing in another hefty 75 basis points hike at the bank's next meeting in early November.
Stocks in the region were mixed, with Prague outperforming and adding 0.28%.