April 4, 2018 / 9:40 AM / a year ago

CEE MARKETS-Zloty, Polish yields fall on surprise CPI decline

    * Polish March annual CPI drops, well below forecasts
    * CPI surprise pushes zloty, Polish bond yields lower
    * Romanian central bank seen increasing main rate again

    By Sandor Peto and Anna Koper
    BUDAPEST/WARSAW, April 4 (Reuters) - The zloty and Polish
bond yields fell after Warsaw data showed a surprise retreat in
inflation, while expectations that Romania's central bank will
hike its rates on Wednesday buoyed the leu.
    Flash figures from Poland showed a slump in annual inflation
in March to 1.3 percent, below analysts' 1.65 percent forecast.
    The zloty weakened by a quarter of a percent
against the euro to 4.2095 by 0838 GMT.
    Inflation figures below expectations could prompt another
cut in the Polish central bank's inflation forecasts in July,
Bank Pocztowy chief economist Monika Kurtek said.
    "This in turn will prompt the MPC to make even more
assurances that interest rates will stay unchanged not only this
year, but also next year," she added. 
    Polish government bond yields dropped by 4-6 basis points,
with the 10-year yield touching its lowest levels since the last
months of 2016, at 3.12 percent.
    Yields can decline further now, and the zloty may briefly
touch a low of 4.25 against the euro in the short term, said
Piotr Poplawski, senior economist with ING in Warsaw.
    Polish bonds had been firming anyway as a low supply is
expected for the coming months and data released on Tuesday
showed a fall in Poland's budget deficit to record lows.

    Warsaw's bluechip stocks index fell 1.3 percent,
leading a decline of equities in the region as China hit back at
U.S. plans to slap tariffs on Chinese goods.
    The index of Warsaw-listed bank's shed 1.4 percent.
    Low central bank interest rates also force commercial banks
to keep their own interest rates low.       
    Poland's data suggest that inflation may have continued to
retreat across Central Europe after a decline in its annual
rates in February in the region, with the exception of Romania.
    While wages surge across the region, boosting consumption
and efficiency-boosting investments, only the Romanian and the
Czech central banks have raised their interest rates to fight
the impacts which they see threatening their inflation goals.
    Analysts expect Romania's central bank to lift its main
interest rate by 25 basis points to 2.5 percent at its meeting
on Wednesday, delivering its third rate hike this year, and to
increase it further to 3 percent by the end of the year.
    The leu was flat at 4.6605 versus the euro.
Romanian government bond prices mostly eased slightly.
     "As today's rate hike is factored into ROMGB (Romanian
government bond prices sufficiently, we maintain our Hold
recommendation for ROMGBs at least for the short-term,"
Raiffeisen analyst Stephan Imre said a note.
    "In the longer-term, though, a certain increase in yields
across the ROMGB curve should be factored in into expectations,"
he added.    
            CEE       SNAPSHOT   AT                         
            MARKETS             1038 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.3290   25.3350    +0.02%    +0.84%
 crown      >                                       
 Hungary    <EURHUF=  312.1000  311.9200    -0.06%    -0.38%
 forint     >                                       
 Polish     <EURPLN=    4.2095    4.1994    -0.24%    -0.79%
 zloty      >                                       
 Romanian   <EURRON=    4.6605    4.6611    +0.01%    +0.41%
 leu        >                                       
 Croatian   <EURHRK=    7.4330    7.4303    -0.04%    -0.04%
 kuna       >                                       
 Serbian    <EURRSD=  118.1500  118.1900    +0.03%    +0.30%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1117.76  1116.660    +0.10%    +3.67%
 Budapest             37513.30  37867.54    -0.94%    -4.73%
 Warsaw                2210.09   2239.15    -1.30%   -10.20%
 Bucharest             8744.76   8764.69    -0.23%   +12.78%
 Ljubljana  <.SBITOP    821.49    819.09    +0.29%    +1.87%
 Zagreb                1805.68   1798.11    +0.42%    -2.02%
 Belgrade   <.BELEX1    746.60    746.98    -0.05%    -1.74%
 Sofia                  651.87    653.14    -0.19%    -3.78%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    0.8310   -0.0070   +141bps     +0bps
   5-year   <CZ5YT=R    1.2470   -0.0400   +134bps     -4bps
   10-year  <CZ10YT=    1.8570   -0.0020   +136bps     +0bps
   2-year   <PL2YT=R    1.4790   -0.0350   +206bps     -3bps
   5-year   <PL5YT=R    2.3370   -0.0500   +243bps     -5bps
   10-year  <PL10YT=    3.1280   -0.0630   +263bps     -6bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                0.96      1.06      1.22      0.90
 Hungary                  0.07      0.10      0.18      0.03
 Poland                   1.72      1.75      1.77      1.70
 Note: FRA  are for ask prices                              
 (Reporting by Sandor Peto
Editing by Matthew Mpoke Bigg)
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