Leu steady, Romanian central bank may increase rates

The Romanian central bank may increase interest rates. (Reuters pic)

BUDAPEST: The leu was steady as investors waited for Wednesday’s announcement of whether the Romanian central bank will continue to increase interest rates.

Some of the leu’s European peers 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 Europe’s liquid currencies: the forint and the zloty have shed about 5% this year and the Czech koruna about 2%.

While the Czech central bank’s interest rate hikes have failed to strengthen the koruna, the leu has been less affected by the sell-off.

The Romanian central bank (NBR) has been increasing interest rates since January. It manages its currency more closely than its regional peers, and the leu is less liquid.

The market is split over whether the bank will deliver its fourth rate hike this year on Wednesday, with many analysts predicting a quarter-point rise in its main rate to 2.75%. No specific time is set for the decision to be made public.

Monetary conditions have effectively tightened in the past 3 months as the NBR allowed the 3-month interbank ROBOR rate to rise by about 120 basis points to 3.17%, above its own benchmark rate.

The leu traded flat at 4.6576 versus the euro at 11.17am local time, while the forint and the Czech koruna firmed 0.2% to 326.8 and 26.09 respectively.

“We don’t really believe the mood in the region and toward the koruna will change to the better,” CSOB analysts said in a note, adding that the koruna may test 26.2 soon.

Romanian government bonds moved sideways.

“Since the funding curve is decoupled from the key policy rate, (the) NBR decision will likely influence mostly the longer tenors (bond yields),” ING analysts said in a note.

In Hungary, the 3-month interbank rate has risen by about 25 basis points to 0.28%.

It has been pulled up by a more than 150 basis point rise in 10-year bond yields this year amid the dollar-driven sell-off in emerging markets, which coincided with worry that Hungary’s inflation could rise above the middle of the central bank’s (NBH) 2% to 4% target.

The NBH, which earlier insisted that interest rates should stay ultra-low for years, abandoned that stance two weeks ago, but that has not prevented a slide in the forint to record lows against the euro as short-term market rates remain low.

The forint became one of the biggest beneficiaries of the yuan’s rebound on Tuesday, boosted by speculation that the NBH may be working on plans to make its pledge to focus its policy
on price stability more credible.

The bank’s experts discussed issues regarding inflation trends with market analysts at a meeting on Wednesday, the NBH’s press office said, confirming Reuters information from dealers.