* Hungary under pressure on monetary, fiscal policy outlook
* Leu extends losses after panel rejects VAT hike
* Polish rates unchanged as expected, zloty down with others
* Serbian cbank intervenes again, reverses dinar slide
(Updates with forint, Polish cbank)
By Krisztina Than and Jason Hovet
BUDAPEST/PRAGUE, Aug 24 (Reuters) - The forint hit a
three-week low and the yield at a Hungarian bill auction rose on
Tuesday after the central bank warned that inflation could be
faster and economic recovery slower than expected.
With risk aversion already rising since last week and
denting appetite for emerging European assets, investors have
ditched Hungarian assets due to weaker growth prospects and a
general lack of clarity for the government's 2011 budget.
The forint <EURHUF=> dropped 1.1 percent and was bid at
285.40 to the euro by 1250 GMT, and the main stock index <>
in Budapest dropped nearly 1 percent to a one-month low.
The decline in Hungarian assets accelerated on Monday after
the central bank depicted a darker economic outlook than
expected.
After leaving its base rate at 5.25 percent, the bank warned
it may need to hike rates if the inflation outlook or risk
assessment worsen, but overall left no clear direction for
market players. []
It also said a government commitment to keep the budget
deficit within sustainable limits was key for investors' trust
after a halt in talks with international lenders the
International Monetary Fund and European Union last month.
"The immediate reason (for weakness) is yesterday's central
bank comments," a Budapest-based currency dealer said.
Hungarian government bonds retreated further from 3-month
highs, with yields up 11-15 basis points, even though a 300
billion forint bond expiry on Tuesday continued to lend some
support to the market. Two-year interest rate swaps rose 20 bps
to around 5.90 percent as markets started betting more on a rate
hike as the next move.
"My interpretation is that this reflects rising concern that
a big rate hike might come, rather than an expectation for a
tightening cycle to begin," the fixed income trader said.
The average yield at a 3-month treasury bill sale rose to
5.38 percent from 5.28 percent a week ago. []
TIGHTER TIMES
Budapest has committed to a budget deficit target of 3.8
percent of GDP for 2010, as agreed under its 20 billion euro
financing deal with the IMF and EU, but it is unclear what
deficit the government will aim for in 2011.
European governments face the challenge of cutting back
state budgets to meet EU criteria and to please investors, while
at the same time not damaging a fragile economic recovery that
is already set to slow down in the last part of the year.
Serbia's central bank sold euros in the market again to stem
a slide of the dinar <EURRSD=>. [] The currency was
bid at 104.88 to the euro, a shade firmer from Monday and up
from intra-day lows at 105.6.
A Romanian parliamentary committee voted against a hike in
value-added tax that is crucial for keeping a 20 billion euro
IMF-led rescue on track for the country, which is still battling
recession. []
The committee has no direct impact on policy but the vote
raises questions about the government's ability to defend the
hike in a parliament vote this week and in early September.
The leu eased 0.2 percent to 4.237 versus the euro. The
Czech crown <EURCZK=> shed 0.3 percent. Stocks also dropped,
with Warsaw <> and Prague <> at month lows.
The Polish zloty <EUPLN=> was flat on the day, and bonds
were little moved after the central bank left the main interest
rate at a record low 3.5 percent. []
A slew of recent data has pointed to a steady recovery for
Poland's economy -- the only one in the region to avoid
recession last year -- and most analysts expect the central bank
to start tightening monetary policy before the end of 2010.
The Czech crown also failed to get a boost from a more
hawkish stance from central banker Eva Zamrazilova, who was
quoted as saying by Lidove Noviny on Tuesday that she wanted
discussion of an interest rate rise very soon. []
--------------------------MARKET SNAPSHOT--------------------
Currency Latest Previous Local Local
close currency currency
change change
today in 2010
Czech crown <EURCZK=> 24.845 24.779 -0.27% +5.93%
Polish zloty <EURPLN=> 4.01 4.01 0% +2.34%
Hungarian forint <EURHUF=> 285.4 282.2 -1.12% -5.27%
Croatian kuna <EURHRK=> 7.28 7.275 -0.07% +0.4%
Romanian leu <EURRON=> 4.237 4.228 -0.21% +0.01%
Serbian dinar <EURRSD=> 104.88 104.92 +0.04% -8.58%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
2-yr T-bond CZ2YT=RR -3 basis points to 104bps over bmk*
7-yr T-bond CZ7YT=RR +2 basis points to +120bps over bmk*
10-yr T-bond CZ9YT=RR +6 basis points to +111bps over bmk*
Hungarian treasury bonds <0#HUBMK=>
3-yr T-bond HU3YT=RR +15 basis points to +596bps over bmk*
5-yr T-bond HU5YT=RR +22 basis points to +557bps over bmk*
10-yr T-bond HU10YT=RR +22 basis points to +480bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1250 CET.
Currency percent change calculated from the daily domestic
close at 1600 GMT.
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(Reporting by Reuters bureaus; Writing by Krisztina Than/Sandor
Peto/Jason Hovet; Editing by Hugh Lawson)
