CEE MARKETS-Forint holds gains as markets eye pause in Hungarian rate cuts

By Krisztina Than

BUDAPEST, Sept 22 (Reuters) - The forint held onto its recent gains on Tuesday ahead of the Hungarian central bank's meeting, where policymakers are expected to pause the rate-cutting cycle, a decision that could lend further support to the currency.

The forint has already outperformed its peers in Central Europe this year, firming 6.2% so far against the euro. The currency has been bolstered by the pro-European stance of Prime Minister Peter Magyar, who took power in May and put euro adoption back on the agenda. Hungarian bonds have also rallied.

The forint was steady at 362 to the euro on Tuesday, after improved global risk sentiment and a drop in oil prices fuelled sharp gains in the previous session.

The forint has settled into the 360-370 range since July, largely undented by the National Bank of Hungary's three straight interest rate cuts.

The NBH is expected to keep its base rate on hold at 5.5% on Tuesday, a Reuters poll showed, and market participants will be on the lookout for details on an ongoing review of the bank's 3% inflation target.

"The National Bank of Hungary is expected to pause its current 'mini' easing cycle, leaving the policy rate at 5.50%. It will also publish a new forecast and may review its inflation target, potentially outlining a two-step reduction from 3.0% to 2.0%," ING Bank said in a note.

ING analysts said a lower inflation target could support long-dated Hungarian bonds and that the forint should also benefit from a more hawkish NBH. "Both a pause and a lower inflation target would signal tighter policy for longer and enhance the carry appeal."

However, a sustained rally in FX and fixed income is unlikely without progress in the geopolitical situation, analysts said.

Other currencies were broadly steady, with the Polish zloty down 0.05% at 4.349 and the Czech crown also trading near late Monday's levels.

Komercni Banka said the crown was less affected than peers in CEE by the recent bounce in global sentiment.

"Running counter to this is the interest rate differential, which narrowed last week after the CNB (Czech central bank) left interest rates unchanged, whereas both the ECB and the Fed raised rates," Komercni Banka said.

Polish bank PKO BP said in a note that oil prices would remain the main factor influencing inflation expectations and government bond valuations.