Forint retreats on doubt CPI rise will bring tighter policy

BUDAPEST: The forint approached 3-month lows on Tuesday due to doubts that the National Bank of Hungary (NBH) will tighten policy further in response to a bigger-than-expected pick-up in inflation.

Hungary's March annual headline and core inflation came in at 3.7 percent and 3.8 percent respectively, near the top of the bank's 2-4 percent target range, driven partly by a rise in the excise tax on tobacco.

Surging wages have increased inflation across Central Europe this year, raising concern in the Czech Republic and Hungary. In Poland and Serbia inflation has remained relatively low.

Serbia's central bank kept its benchmark interest rate, the highest in the region, unchanged at 3 percent on Tuesday as expected, citing low inflation and a stable dinar.

The dinar was bid a shade weaker, at 117.99 versus the euro at 1409 GMT.

All Central European units eased, except for the zloty .

The forint shed 0.1 percent to 321.96, near 322.33, near its weakest levels since the middle of January.

Hungary's 10-year government bond yield was fixed 5 basis points higher at 3.14 percent.

The currency initially firmed after the inflation data, but expectations of more NBH policy-tightening were quickly replaced by doubts, market participants said.

Just three weeks ago the forint was trading at 11-month highs at 312.65, boosted by NBH pledges of gradual policy tightening if core inflation exceeded 3 percent.

But the forint gave up all of this year's gains after the bank raised its overnight deposit rate slightly to -0.05 percent late last month and announced some liquidity tightening in interbank markets. It also dropped its hawkish bias, saying that data would drive its policy.

"Investors bought the forint on the earlier pledges (to tighten policy), but will not go into the same street again," one dealer said.

The forint is still far from the record lows beyond 330, reached last year after a rise in headline inflation which caused market jitters. The NBH was regarded as one of the most dovish central banks in the world at that time.

But fears over a global economic slowdown have made the Federal Reserve and euro zone interest rate outlooks more accommodative since then, reducing pressure on smaller central banks to tighten their policy as well.

The leu eased 0.3 percent to 4.7605 against the euro. It has retreated this week as liquidity in leu markets increased slightly, pushing the 3-month interbank rate slightly lower.