CEE MARKETS-Crown firms after CNB says slow appreciation could lead to faster tightening

tightening@

* Czech central bank: rates could rise if crown does not firm

* Crown extends gains, other CEE currencies are mixed

* Hungarian bond auction draws robust demand

* Romanian central bank chief defends rate hikes under pressure

(Recasts with Czech central bank decision, comments from Czech, Polish and Romanian central banks, Hungarian bond auction) BUDAPEST/WARSAW, March 29 (Reuters) - The crown extended its gains on Thursday after Czech central bank (CNB) Governor Jiri Rusnok said the pace of policy tightening could speed up if the currency appreciates too slowly. The bank has raised interest rates three times since August but has paused after inflation dropped below its 2 percent target and said on Thursday it saw slightly anti-inflationary risks to its forecast seeing the next hike around the end of this year. Rusnok's comments after a meeting of the CNB rate setting body were closely watched as a retreat in inflation rates in most of central Europe in February had led to some expectations of a shift towards less hawkish rhetoric. Rusnok said the board's debate at the meeting was "very lively" before it voted unanimously to keep rates on hold, in line with analysts' forecasts. The CNB board said it saw an inflationary risk in a possible slower appreciation of crown against the euro in the quarters ahead, compared to its forecasts. This, according to Rusnok, would allow for a faster pace of further interest rate tightening. The crown firmed 0.2 percent against the euro to 25.406 by 1338 GMT. The yield of 3- and 5-year Czech government bonds, meanwhile, dropped by 4 basis points, in line with most bond markets in the region. Data released before the CNB meeting showed that the proportion of foreigners' holding Czech state domestic bonds was almost steady at 37.72 percent in February, which showed they were in no rush to close their positions. A stronger crown would allow them to take profit on the large amount of positions they built before the CNB removed a cap on the currency a year ago. Hungarian government bonds also extended their gains slightly as an auction drew strong demand. The Hungarian central bank reiterated this week that it would continue to fuel demand for long bond maturities by providing markets with cheap financing through its swap facilities and by buying mortgage notes. The government sold 82 billion forints (323.8 million) worth of bonds, above its original 53 billion forint offer. The 10-year bond yield was fixed at 2.39 percent, down 2 basis points from Wednesday. Hungary's and Poland's 10-year yields are expected to rise U.S. yields, according to a new Reuters poll of analysts.

Poland's 10-year yield dropped 3 basis points to 3.19 percent, after its finance ministry projected a slowdown in debt issuance and the central bank released the minutes of its last meeting which contained dovish comments.

Romania's leu eased 0.1 percent against the euro. Romanian Central Bank Governor Mugur Isarescu defended the rate hikes delivered so far this year at a parliament committee meeting. "We're between a rock and a hard place," he said. "On the one hand we are being accused of acting too slowly, and on the other it has been suggested we hit economic growth in the head like a ram at the start of the year through rate hikes."

CEE SNAPSHOT AT MARKETS 1538 CET

CURRENCI ES

Latest Previous Daily Change bid close change in 2018 Czech <EURCZK= 25.4060 25.4510 +0.18% +0.54% crown > Hungary <EURHUF= 312.2000 312.2700 +0.02% -0.41% forint > Polish <EURPLN= 4.2080 4.2035 -0.11% -0.75% zloty > Romanian <EURRON= 4.6580 4.6525 -0.12% +0.47% leu > Croatian <EURHRK= 7.4295 7.4425 +0.17% +0.01% kuna > Serbian <EURRSD= 118.3500 118.5600 +0.18% +0.13% dinar > Note: calculated from 1800 CET

daily change

Latest Previous Daily Change close change in 2018 Prague 1124.21 1119.050 +0.46% +4.27%

0

Budapest 37314.08 36783.31 +1.44% -5.24% Warsaw 2221.75 2203.70 +0.82% -9.73% Bucharest 8716.73 8726.88 -0.12% +12.42% Ljubljana <.SBITOP 817.45 821.53 -0.50% +1.37% > Zagreb 1807.12 1813.98 -0.38% -1.94% Belgrade <.BELEX1 748.90 746.10 +0.38% -1.43%

5>

Sofia 647.14 654.09 -1.06% -4.47%

BONDS

Yield Yield Spread Daily (bid) change vs Bund change

in

Czech spread

Republic

2-year <CZ2YT=R 0.7740 0.0490 +137bps +6bps

R>

5-year <CZ5YT=R 1.2500 -0.0360 +135bps -3bps

R>

10-year <CZ10YT= 1.8680 -0.0380 +137bps -4bps

RR> Poland

2-year <PL2YT=R 1.5100 -0.0090 +211bps +0bps

R>

5-year <PL5YT=R 2.3630 -0.0240 +246bps -2bps

R>

10-year <PL10YT= 3.1920 -0.0270 +269bps -3bps

RR>

FORWARD RATE AGREEMEN

T

3x6 6x9 9x12 3M

interban k

Czech Rep 0.97 1.07 1.22 0.90

<PRIBOR=

>

Hungary 0.07 0.12 0.19 0.03 Poland 1.74 1.75 1.77 1.70

Note: FRA are for ask prices quotes

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************* ($1 = 253.2400 forints)

(Additional reporting by Luiza Ilie in Bucharest Editing by Edmund Blair and Raissa Kasolowsky)