Forint, zloty sink to record lows as global sell-off weighs

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  • Forint falls as far as 400 per euro, zloty crosses 5.00
  • Banks lead stock losses
  • Hungary debt agency steps in to support bond market
  • Markets off morning lows by afternoon trade

PRAGUE/BUDAPEST, March 7 (Reuters) - Hungary's forint and Poland's zloty sank to record lows on Monday and central European banks slumped, as investors retreated from assets in the region while Western countries mulled a Russian oil import ban. read more

Central Europe has been hit hard by the flight to safer assets following Russia's invasion of Ukraine, with heightened concerns over the stagflationary effects of the crisis amid an energy price rise. read more

That is piling pressure on rate-setters in the region who have already been raising borrowing costs sharply since last year to tackle surging inflation. The sharp falls in currencies in the past week has already prompted the Czech and Polish central banks to step into the markets. read more

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Eyes on Monday were turned to Hungary, where the forint - coming off its biggest weekly loss ever - slid more than 3% in morning trade before recovering some ground. It was down 2.3% on the day at 394.75 to the euro at 1231 GMT after hitting an all-time low of 400 in the session.

"The significant weakening of the forint will probably force the central bank to take an extraordinary step. Central bankers were supposed to have a non-rate-setting meeting on Tuesday, which means that they would not have changed the rate but because of the forint's depreciation they will almost definitely modify conditions," said David Nemeth, an analyst at K&H Bank.

He noted that Hungary had the lowest level of foreign reserves in the region at around 26% of gross domestic product, according to central bank data, while Czech reserves are around 66% of GDP.

The Czech National Bank said last week that it was intervening in markets against excessive fluctuations and depreciation of the crown. It did not comment on Monday on whether it was again active.

The crown was down 0.4% on the day at 25.755 to the euro, falling less than peers in central Europe.

Poland's zloty fell to a record low of 5.0049 per euro and was down 2.35% on the day at 4.967 by the afternoon. Last week, the Polish central bank also sold foreign currency to prop up its currency.

BIGGER POLISH RATE HIKE?

Analysts polled by Reuters last week predicted a 50 bps rate hike when the Polish central bank meets on Tuesday.

Bank Pekao said chances were rising for a bigger hike. "We're betting a 100 basis point rise," it said. "The zloty is heavily undervalued and has moved away from its foundations, but this is the direction of gravity now. Faster rate hikes may (somewhat) ease the pressure."

Bond markets were also under pressure, with 10-year yields in Hungary climbing around 30 basis points in the morning. Hungary's government debt agency AKK lifted the mandatory market-making obligation for primary dealers on Monday as market liquidity dried up amid the forint's slump.

On stock markets, Warsaw's bank index (.BNKI), (.WIG20) lost almost 8% in early trade before settling in the afternoon, down 2.4%. Czech lender Komercni Banka (BKOM.PR) dropped 12% to lead Prague down 6.2% (.PX).

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Reporting by Jason Hovet in Prague, Krisztina Than and Anita Komuves in Budapest and Alicja Ptak and Pawel Florkiewicz in Warsaw; Editing by Sherry Jacob-Phillips

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