PRAGUE, Jan 14 (Reuters) - The Czech crown gained past a key level against the euro on Tuesday to touch a 23-month high as markets priced in rising chances of an interest rate increase this year. Prague stocks also traded at their highest in nearly two years.
Other central European currencies strengthened as well, led by the Hungarian forint's EURHUF= 0.5% rise after stronger-than-expected inflation data showed price growth hitting a seven-year high of 4.0%.
"Investors, foreign ones especially, took the rise in inflation as a clue that the central bank may tighten monetary conditions," a dealer said, adding tightening by the Hungarian central bank, viewed as the most dovish in the region, was still unlikely.
The Hungarian central bank lowered its own inflation gauge on Tuesday and has said it was committed to an accommodative, loose monetary policy.
Stock markets gave back some of their recent gains won so far this year on improving global sentiment as the United States and China moved closer to a trade deal.
Prague's market .PX climbed to its highest since February 2018 in early Tuesday trade, at 1,141.13 points, It was up 0.2% by mid-morning.
The crown EURCZK= retreated by 0955 GMT and was steady at 25.215 to the euro, with a dealer saying the move stronger was helped by lower liquidity and better sentiment in the region but that the 25.18 level was showing resistance.
The Czech National Bank has kept the main two-week repo rate CZCBIR=ECI unchanged at its last five monetary policy meetings, balancing domestic inflationary pressures with uncertainties abroad affecting the export-reliant Czech economy.
In recent months, Czech markets have priced out chances of a rate cut in the next year. They now are starting to price in higher chances of a rate increase this year after inflation came in above the upper end of the bank's tolerance band around its 2% target the past two months.
Central bank Vice-Governor Marek Mora said late on Monday he saw stable or mildly higher interest rates this year as the most likely.
"For me, if the indications of a revival abroad remain, and developments abroad tend towards optimistic, then I could imagine myself leaning again towards raising interest rates," Mora told Czech Television.
Analysts said the crown's gains might help keep the central bank's hand steady. "The stronger the crown, the weaker the chance the central bank will tighten ... That is always the dilemma for markets," ING economist Jakub Seidler said.
Note: daily change
Note: FRA quotes
are for ask prices
Czech rate expectationshttps://tmsnrt.rs/2tX0cc9
(Reporting by Jason Hovet in Prague, Marton Dunai in Budapest, Alicja Ptak in Warsaw and Luiza Ilie in Bucharest; editing by Larry King)
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