By Anita Komuves
BUDAPEST, Aug 26 (Reuters) - The forint weakened on Wednesday, underperforming regional peers, while Hungarian government bond yields dropped after the central bank said on Tuesday it would increase its government bond purchases.
The National Bank of Hungary left its base rate unchanged on Tuesday and announced an increase in its weekly bond buys, which has driven yields lower, traders said.
Yields on the 20-year bond dropped 23 basis points since the announcement, from 3.05% before the NBH announcement to 2.82%, according to two fixed income traders in Budapest.
They both expect long-term bond yields to drop further in reaction to the expansion of the bank's programme.
Yields on the 10-year bond fell 7 basis points to 2.24% while 5-year bond yields dropped 5 basis points to 1.57% and yields on 3-year bonds were at 1.12%, down 2 bps, they said.
The forint reached a one-month low around 354 against the euro after the central bank's meeting but rebounded to 352.22 after Deputy Governor Barnabas Virag's comments that the bank has no room to cut short-term rates further.
These gains all evaporated on Wednesday. The currency EURHUF= was down 0.51%, trading at 354.300 per euro by 0952 GMT.
The central bank, which cut its base rate in June and July, said in a statement that it expected the disinflationary effects of the pandemic to rein in price growth.
Inflation came in at a higher-than-expected annual 3.8% in July and GDP dropped by 13.6% year-on-year in Q2.
"The FX market correctly suspects that the MPC will probably not re-think its stance over the coming year, no matter what happens to inflation," Commerzbank said in a note.
"This is why the forint is likely to keep underperforming: we forecast EUR-HUF to trade at 360.00 levels next year."
Elsewhere, the Czech crown EURCZK= eased 0.15% to 26.205 versus the euro while the Polish zloty EURPLN= and the Romanian leu EURRON= were stable.
Hungary plans to finance an increased budget deficit this year by boosting its forint-denominated government bond sales, the debt management agency AKK said on Wednesday.
The Polish state investment bank BGK will hold a bond auction on Wednesday to finance the government's anti-crisis shield to protect the economy from the coronavirus.
The Czech finance ministry is also holding a government bond auction later today.
Stocks in the region were mixed, with Budapest .BUX weakening 0.41% and Prague .PX flat. Warsaw's equities .WIG20 were up 0.33% and Bucharest's index .BETI firmed 0.37%.
AT 1152 CET
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(Additional reporting by Jason Hovet in Prague and Alan Charlish in Warsaw; Editing by Alex Richardson)
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