Leu retreats as central bank surprises by keeping rates on hold

06 Aug, 2018

Five out of eight analysts in a Reuters poll had predicted that the central bank, which started to push up its main interest rate in January, would raise it by a quarter percentage point to 2.75 percent.

The leu extended its early losses against the euro, trading at 4.628 versus the euro at 0915 GMT, down 0.2 percent, after the bank said that it would not raise rates.

Central European currencies mostly eased as the Sino-US trade war weighed on risk appetite in global markets. But they stayed near multi-week highs, and in the case of the leu near Friday's seven-month highs.

Along with the Czechs, Romania is the only economy in Central Europe where rising inflation has led to central bank interest rate hikes.

Romania's annual inflation rate, which ran at 5.4 percent in June, is the highest in the region, and is above the central bank's target of 1.5 to 3.5 percent.

A high base in late 2017 is expected to help it fall rapidly. The July reading due on Friday may already show a fall.

The 10-year Romanian government bond yield edged up by 3 basis points after the decision, bid at 5.05 percent. The three-month Romanian interbank ROBOR rate dropped 7 basis points to 3.09 percent, but stayed near its highest levels in 4 1/2 years, reached on Friday.

Elsewhere, the forint weakened by 0.2 percent and the zloty shed a third of a percent against the euro. The Czech crown was flat at 25.649.

June's annual Czech figures released showed a slower-than-expected 4.8 percent rise in retail sales, but a 3.4 percent increase in industrial output was above analysts' forecasts.

The Czech central bank is still expected to raise rates one more time this year, after it raised its main rate by 25 basis points to 1.25 percent last week, Erste analyst Jan Zemlicka said in a note.

"In 2019, we expect two additional interest rates increases, but again, the development will strongly depend on koruna (the crown)," he added.

The zloty has been helped by last week's Polish Supreme Court ruling to suspend a controversial law to overhaul the judiciary system, but the government could still go ahead with the reform, analyst Gintaras Shlizhyus said in a note.

Polish central bank rate setter Grazyna Ancyparowicz was quoted on Saturday as saying that interest rates would most likely remain unchanged until the end of 2020.

Copyright Reuters, 2018
 

 

 

 

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