CEE MARKETS-Rate hike bets buoy Czech crown despite inflation fall

    * Czech inflation drops to target as expected
    * CNB seen holding fire on Dec. 20, increasing rates next
    * Crown sets a 5-week highs, Brexit fears keep investors
    * Croatian central bank could continue to sell kuna-analysts

    By Sandor Peto and Igor Ilic
    BUDAPEST/ZAGREB, Dec 10 (Reuters) - The crown set a 5-week
high against the euro on Monday as expectations for further
Czech central bank interest rate hikes prevailed despite a drop
in annual inflation in November.
    Inflation dropped to 2 percent, the central bank's target
level, from 2.2 percent in October.
    The crown reached its strongest levels since early
November at 25.844 versus the euro before retreating to 25.855
by 1004 GMT, still firmer by 0.1 percent from Friday.
    Other Central European currencies were steady or a touch
easier, while global fears of an economic slowdown pushed
regional equities mostly lower, with Warsaw's bluechip index
 shedding 0.4 percent.
    Investors were cautious ahead of Tuesday's vote in which
Britain's parliament could reject a deal on the terms of the
exit from the European Union.
    "Brexit" without set terms would pose some risks to Central
European economies and Poland in particular, in part due to
their trade links with Britain.
    Trade was slow in the crown's market after the inflation
figures, one dealer said.
    The inflation drop confirms that the CNB could take a pause
at its Dec. 20 meeting after four straight rate hikes. But
inflation pressure remains strong despite the fall driven by a
decline in food and packaged holiday prices, and will require
tighter monetary conditions, Erste analysts said in a note.
    "If koruna (the crown) starts appreciating again, we expect
the CNB to deliver only one additional hike approx. in the
middle of the next year," Erste said, adding that three hikes
may come if the crown does not strengthen.
    Pressure on some of the region's central banks to increase
interest rates has eased in the past two months as global crude
prices sharply retreated.
    "The crude slump has rewritten expectations. People are
waiting," one Budapest-based fixed income trader said, adding
that Hungary's central bank could keep its rates on hold at its
meeting on Dec. 18.
    The Croatian central bank, which manages the kuna in tight
ranges, even had to sell the unit last week to stem its
strengthening driven by European Union fund inflows, tourism
revenues and increased lending in the local currency.
    Further interventions are likely, Erste said in a separate
note. The kuna traded near 5-month highs, at 7.385 against the
    Romania is also expected to report on Tuesday a fall in
annual inflation, to 3.7 percent in November from 4.3 percent in
October, which may provide support to Romanian government bonds,
analysts said.
    "With liquidity conditions improving, today's October-2020
bond auction should see good demand," ING Bank said in a note. 
            CEE       SNAPSHOT   AT                         
            MARKETS             1104 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.8550   25.8780    +0.09%    -1.21%
 crown      >                                       
 Hungary    <EURHUF=  323.2400  323.1800    -0.02%    -3.81%
 forint     >                                       
 Polish     <EURPLN=    4.2912    4.2910    -0.00%    -2.68%
 zloty      >                                       
 Romanian   <EURRON=    4.6514    4.6464    -0.11%    +0.61%
 leu        >                                       
 Croatian   <EURHRK=    7.3850    7.3882    +0.04%    +0.61%
 kuna       >                                       
 Serbian    <EURRSD=  118.1400  118.3200    +0.15%    +0.30%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1035.07  1040.370    -0.51%    -4.00%
 Budapest             39444.11  39384.56    +0.15%    +0.17%
 Warsaw                2270.56   2281.54    -0.48%    -7.75%
 Bucharest             8661.14   8684.75    -0.27%   +11.70%
 Ljubljana  <.SBITOP    806.52    812.31    -0.71%    +0.02%
 Zagreb                1702.83   1714.89    -0.70%    -7.60%
 Belgrade   <.BELEX1    741.22    745.40    -0.56%    -2.45%
 Sofia                  593.81    595.32    -0.25%   -12.35%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.6150   -0.0030   +220bps     -2bps
   5-year   <CZ5YT=R    1.8000    0.0370   +208bps     +1bps
   10-year  <CZ10YT=    2.0340    0.0060   +179bps     +1bps
   2-year   <PL2YT=R    1.5660    0.0140   +215bps     +0bps
   5-year   <PL5YT=R    2.4700    0.0330   +275bps     +1bps
   10-year  <PL10YT=    3.0420    0.0370   +280bps     +4bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.14      2.24      2.30      2.01
 Hungary                  0.31      0.54      0.84      0.13
 Poland                   1.75      1.76      1.79      1.72
 Note: FRA  are for ask prices                              
 (Additional reporting by Radu Marinas in Bucharest
Editing by Matthew Mpoke Bigg)

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