CEE MARKETS-Leu eases as rate kept on hold, forint rebound continues
* Leu falls as Romanian central bank does not hike rates further * Markets had been deeply split over Romanian hike or hold * Central bank chief says inflation will fall from 5-year high * Yuan fall reversal helps, forint assets sharply rebound (Recasts with Romanian central bank decision and comments, analyst comments, graphics) By Sandor Peto BUDAPEST, July 4 (Reuters) - The leu weakened against the euro on Wednesday after Romania's central bank (BNR) kept interest rates on hold even though many market participants had expected a hike. The leu underperformed its main regional peers, which firmed as investors scaled back some of their currency selling positions in emerging markets after the Chinese central bank moved to reverse two months of falls in the yuan. In the same period, capital flows into the dollar knocked Central Europe's liquid currencies: the forint and the zloty have shed almost five percent against the euro this year and the Czech crown two percent. The forint firmed 0.6 percent to 325.5 by 1322 GMT, drifting further off Monday's record lows of 330.70, the zloty gained 0.4 percent to 4.3795, and the crown 0.3 percent to 26.07. The leu, less liquid and more closely managed by the central bank, has been steady this year, but eased 0.1 percent on Wednesday. It briefly touched a nine-day low of 4.6685 after the BNR kept its main rate on hold at 2.5 percent, but stayed well off record lows set at 4.7 two weeks ago. BNR Governor Mugur Isarescu said Romanian monetary conditions were tighter than the bank's main rate showed. The 3-month interbank ROBOR rate has risen by about 130 basis points since late March to around 3.17 percent, above the central bank's benchmark rate, as interbank liquidity tightened. Romania's inflation, running at 5.4 percent in May, is the highest in the region. But Isarescu said it could fall to 3.6 percent by December, near the bank's 1.5-3.5 percent target range. Elsewhere, the forint plunged and Hungarian government bond yields have surged in the past two months as the sell-off in emerging markets conincided with worries that inflation could rise above the cenre of the National Bank of Hungary's (NBH) 2-4 percent target range. The Czech central bank failed to reverse a slide of the crown to defend its two percent inflation target with a rate hike last week. The forint reached record lows and Hungarian bond yields multi-year highs early this week even though the NBH two weeks ago abandoned its pledge to keep rates at record lows for years. It repeated that on Wednesday in the minutes of its June 19 meeting. The improved mood in international markets, meanwhile, caused a sharp reversal in oversold, jittery forint markets since Tuesday afternoon, traders said. The country's 10-year bonds traded at a yield of 3.55 percent, down from Tuesday's peak around 3.78 percent, after 10-20 basis point rise in yields early on Tuesday. "Foreign investors have started to buy Hungarian bonds again," one Budapest-based fixed income trader said. The pressure on the NBH has eased, and now it is unlikely to shift to policy tightening before its September inflation report, unless the forint falls again significantly in a lasting way, adding to inflation, ING analyst Peter Virovacz said. "What we have seen in the forint's strengthening now, is a global, rather than a local impact," he said. CEE SNAPSHOT AT MARKETS 1522 CET CURRENCI ES Latest Previous Daily Change bid close change in 2018 Czech Hungary Polish Romanian Croatian Serbian Note: calculated from 1800 CET daily change Latest Previous Daily Change close change in 2018 Prague 1073.04 1076.020 -0.28% -0.47% 0 Budapest 36414.04 36204.30 +0.58% -7.53% Warsaw 2168.82 2160.24 +0.40% -11.88% Bucharest 8002.14 7943.05 +0.74% +3.20% Ljubljana Zagreb 1795.72 1800.96 -0.29% -2.56% Belgrade Sofia 628.45 626.53 +0.31% -7.23% BONDS Yield Yield Spread Daily (bid) change vs Bund change in Czech spread Republic 2-year 5-year 10-year Poland 2-year 5-year 10-year FORWARD RATE AGREEMEN T 3x6 6x9 9x12 3M interban k Czech Rep 1.40 1.60 1.74 1.17 Hungary 0.77 1.00 1.22 0.30 Poland 1.75 1.78 1.84 1.70 Note: FRA are for ask prices quotes ************************************************* ************* (Additional reporting by Luiza Ilie in Bucharest and Jason Hovet in Prague, Editing by Alison Williams, William Maclean)