Crown rises after CNB says slow appreciation could lead to faster tightening

The crown extended its gains on Thursday after Czech central bank (CNB) Governor Jiri Rusnok said the pace of policy tightening could speed up if the currency appreciates too slowly. The bank has raised interest rates three times since August but has paused after inflation dropped below its 2 percent target and said on Thursday it saw slightly anti-inflationary risks to its forecast seeing the next hike around the end of this year.
Rusnok's comments after a meeting of the CNB rate setting body were closely watched as a retreat in inflation rates in most of central Europe in February had led to some expectations of a shift towards less hawkish rhetoric. Rusnok said the board's debate at the meeting was "very lively" before it voted unanimously to keep rates on hold, in line with analysts' forecasts.
The CNB board said it saw an inflationary risk in a possible slower appreciation of crown against the euro in the quarters ahead, compared to its forecasts. This, according to Rusnok, would allow for a faster pace of further interest rate tightening. The crown firmed 0.2 percent against the euro to 25.406 by 1338 GMT. The yield of 3- and 5-year Czech government bonds, meanwhile, dropped by 4 basis points, in line with most bond markets in the region.
Data released before the CNB meeting showed that the proportion of foreigners' holding Czech state domestic bonds was almost steady at 37.72 percent in February, which showed they were in no rush to close their positions. A stronger crown would allow them to take profit on the large amount of positions they built before the CNB removed a cap on the currency a year ago.
Hungarian government bonds also extended their gains slightly as an auction drew strong demand. The Hungarian central bank reiterated this week that it would continue to fuel demand for long bond maturities by providing markets with cheap financing through its swap facilities and by buying mortgage notes.
The government sold 82 billion forints (323.8 million) worth of bonds, above its original 53 billion forint offer. The 10-year bond yield was fixed at 2.39 percent, down 2 basis points from Wednesday. Hungary's and Poland's 10-year yields are expected to rise by 40-50 basis points in the next 12 months, tracking Bunds and US yields, according to a new Reuters poll of analysts.
Poland's 10-year yield dropped 3 basis points to 3.19 percent, after its finance ministry projected a slowdown in debt issuance and the central bank released the minutes of its last meeting which contained dovish comments. Romania's leu eased 0.1 percent against the euro. Romanian Central Bank Governor Mugur Isarescu defended the rate hikes delivered so far this year at a parliament committee meeting.