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CEE MARKETS-Leu retreats as central bank pumps money into market

* Czech two-year yield above zero for first time since Aug 2016

* Leu retreats from near 6-week highs after central bank meeting

* Romanian central bank narrows rate corridor, pumps in money

* Romanian central bank warns of inflation, pledges to fight it

(Recasts with Romanian central bank meeting) BUDAPEST/BUCHAREST, Oct 3 (Reuters) - Expectations for some monetary tightening in Central Europe helped the mid-yield on the Czech two-year government bond to rise above zero on Tuesday for the first time in more than a year. The leu retreated from six-week highs as the Romanian central bank narrowed the interest rate corridor around its main rate and injected 9.4 billion lei into the market via a one-week repo tender to ease a liquidity squeeze. After years in which interest rates trended downwards across the region, policy divisions are starting to emerge, with a rebound in inflation becoming a worry for central banks in the Czech Republic and Romania. Romania's central bank keep its main interest rate on hold at a record low 1.75 percent at its meeting on Tuesday as expected, and narrowed the gap between its deposit an lending rates to plus or minus 1.25 percent, from 1.5 percent.

Its repo tender, which allotted money to 13 banks, eased a squeeze, which had buoyed the leu, but contributed to a rise in the three-month interbank rate to the highest levels since late 2014 in recent days. Prime Minister Mihai Tudose criticized the central bank on Friday for allowing the rise. The leu, which reached six-week highs against the euro late on Monday, traded at 4.5885 at 1410 GMT, down 0.1 percent on the day. Central bank Governor Mugur Isarescu warned at a news conference that consumer prices could rise faster than earlier expected and that the bank will take "all needed measures" to keep inflation within the target. Among European Union countries, so far only the Czech central bank has followed the U.S. Federal Reserve in raising borrowing costs, lifting its main rate in early August. Expectations for another increase in November have been buoying Czech debt yields and helped the crown strengthen above the 26 to the euro. The two-year Czech bond yield rose above zero, to 0.03 percent. The crown traded steady at 25.931. "We are close (to 25.900) but we have bounced back already three times so far but every time above 26.000," one dealer said. "As we are below now and as long as we stay here for a few days I think we can test that level, but I don't think it'll be a massive break." Foreign investors are sitting on a pile of long crown positions. They bought tens of billions of euros worth of the currency before the central bank in April removed a cap which had kept the crown weaker than 27 to the euro for years.

CEE MARKETS SNAPSH AT 1610 CET

OT CURRENCIES

Latest Previo Daily Change

us

bid close change in

2017

Czech crown 25.931 25.927 -0.01% 4.15% 0 5 Hungary 312.05 312.24 +0.06 -1.04% forint 00 00 % Polish zloty 4.3085 4.3167 +0.19 2.21%

%

Romanian leu 4.5885 4.5849 -0.08% -1.17% Croatian 7.4845 7.4985 +0.19 0.94% kuna % Serbian 119.11 119.16 +0.04 3.56% dinar 00 00 % Note: daily calculated previo close 1800 change from us at CET

STOCKS

Latest Previo Daily Change

us

close change in

2017

Prague 1049.9 1050.7 -0.07% +13.9 8 4 3% Budapest 37950. 37751. +0.52 +18.5 01 85 % 8% Warsaw 2469.4 2469.5 -0.03% +26.7 9 8 8% Bucharest 7901.9 7894.2 +0.10 +11.5 1 6 % 3% Ljubljana 800.31 795.37 +0.62 +11.5 % 3% Zagreb 1805.2 1807.5 -0.13% -9.51% 3 3 Belgrade 721.10 719.50 +0.22 +0.52 % % Sofia 680.67 687.75 -1.03% +16.0

7% BONDS

Yield Yield Spread Daily (bid) change vs change Bund in Czech spread

Republic

2-year 0.254 -0.028 +095b -4bps

ps

5-year 0.328 -0.004 +060b -1bps

ps

10-year 1.338 0.01 +087b +0bps

ps Poland

2-year 1.755 0.006 +246b +0bps

ps

5-year 2.709 0.013 +298b +1bps

ps

10-year 3.382 0.022 +292b +1bps

ps

FORWARD RATE AGREEMENT 3x6 6x9 9x12 3M

interb ank

Czech Rep <PR 0.75 0.89 1.02 0

IBOR=>

Hungary <BU 0.07 0.11 0.14 0.03

BOR=>

Poland <WI 1.769 1.822 1.886 1.73

BOR=>

Note: FRA are for ask quotes prices ******************************************************** *****

(Additional reporting from Luiza Ilie in Bucharest/Jason Hovet in Prague; Editing by Larry King)