Conflict between neighbouring Ukraine and Russia has slowed economic recovery in Central Europe, contributing to expectations that Poland's central bank will resume rate cuts that appeared to have ended last year.

The region's most liquid currencies, including the zloty were flat against the euro. Poland's 5-year benchmark bond yield , which hit record lows in recent days, rose to 2.65 percent from 2.63 percent at Monday's close.

Analysts said investors would watch Polish employment and corporate sector wages figures for July, due at 13:00 PM BST, and Wednesday's industrial output data, for clues on central bank policy and the direction of the zloty and Polish bonds.

Rate setters have been split over the need for an interest rate cut. Rate-setting council member Anna Zielinska-Glebocka was quoted as saying on Monday that recent data and developments were pushing the bank closer to a 25- or 50-basis-point cut in its 2.5 percent main interest rate.

"If the data disappoint, the probability of an NBP (central bank) rate cut in September will rise," Commerzbank said in a note. "However, any impact on the PLN (the zloty) is likely to be moderate, as most market participants expect a rate cut in the next few months anyway."

Hungary's central bank ended two years of rate cuts last month, reducing its base rate to 2.1 percent. But Treasury bill yields fell to record lows, decoupling from the base rate, partly due to buying by local funds that no longer have access to the central bank's two-week facility.

Traders will watch an auction of 3-month Treasury bills, which were sold at an average yield of 1.47 percent a week ago. Short-term Hungarian yields may stay low as bill expiries are expected to exceed sales in the next weeks, making it cheap to speculate against the forint, Erste Investment said in a note.

The brokerage recommended investors bet for a weakening of the forint to 250 against the dollar. It was quoted at 234.94/235.05 at 09:22 AM BST.

The region's main equity indices mostly rose, led by a 0.9 percent gain in Budapest <.BUX>. Hungarian government bond yields dropped by 3-4 basis points.

Russia is working on more retaliatory measures in case Western nations impose new sanctions, President Vladimir Putin's spokesman, Dmitry Peskov, said on Tuesday. A newspaper report on Monday said a car import ban was possible, which could hit economic output in several Central European states hard.

* *

**************** CEE MARKETS SNAPSHOT AT 0957 CET ************

************************* CURRENCIES *************************

Latest Previous Daily Change

bid close change in 2014

Czech crown 27.900 27.927 +0.10% -2.04%

Hungary forint 313.760 313.725 -0.01% -5.35%

Polish zloty 4.187 4.187 +0.01% -0.88%

Romanian leu 4.436 4.436 +0.00% +0.55%

Croatian kuna 7.610 7.620 +0.12% +0.11%

Serbian dinar 117.360 117.445 +0.07% -2.44%

Note: daily change calculated from previous close at 1800 CET

**************************** STOCKS **************************

Latest Previous Daily Change

close change in 2014

Prague <.PX> 987.54 984.68 +0.29% +0.06%

Budapest <.BUX> 17830.22 17670.58 +0.90% -2.75%

Warsaw <.WIG20> 2453.66 2448.73 +0.20% +2.05%

Bucharest <.BETI> 7060.97 7067.33 -0.09% +9.00%

Ljubljana <.SBITOP> 793.94 790.02 +0.50% +23.86%

Zagreb <.CRBEX> 1841.07 1833.17 +0.43% +3.41%

Belgrade <.BELEX15> 0.00 612.93 +0.00% -100.0%

Sofia <.SOFIX> 541.36 542.50 -0.21% +10.17%

***************************** BONDS **************************

Yield Yield Spread Daily

(bid) change vs Bund change in

Czech Republic spread

2-year 0.202 -0.013 +021bps -1bps

5-year 0.558 -0.006 +033bps +0bps

10-year 1.392 -0.004 +038bps +0bps


3-year 3.410 +0.030 +340bps +3bps

5-year 3.750 +0.000 +352bps +0bps

10-year 4.750 -0.090 +374bps -9bps


2-year 2.269 -0.020 +228bps -2bps

5-year 2.655 +0.000 +243bps +0bps

10-year 3.133 +0.000 +212bps +0bps

******************* FORWARD RATE AGREEMENTS ******************

3x6 6x9 9x12 3M interbank

Czech Rep 0.350 0.375 0.370 0.35

Hungary 2.260 2.340 2.490 2.15

Poland 2.280 2.170 2.165 2.66

Note: FRA quotes are for ask prices


(Reporting by Reuters buros)

By Sandor Peto