POLL-Crown seen leading CEE FX gains as central bank fights inflation

By Sandor Peto

BUDAPEST, Oct 4 (Reuters) - The Czech crown could lead a firming of Central Europe's most liquid currencies in the coming year, driven by likely further interest rate hikes by the Czech central bank, a Reuters poll of 42 analysts showed.

The median forecast in the Sept. 28-Oct. 3 poll showed that the crown could firm 2.9 percent against the euro to 25.05 in the next 12 months relative to its mid-Wednesday level.

The forint and the zloty are seen gaining about 1 percent each to 320 and 4.24 per euro, respectively.

The crown suffered less than its regional peers in the past six months when a global rally in the dollar caused selling in other emerging markets.

In recent weeks, when pressure on the forint and the zloty eased, the crown underperformed, even though the central bank raised interest rates at each of its last three rate meetings.

On Tuesday it hit a 2-1/2-month low at 25.875 against the euro as worries over Italy's budget deficit and debt sent jitters across European markets.

The concerns eased by Wednesday.

But the crown's weakness relative to the central bank's 25.3 projection for the fourth quarter could make the bank bring forward its expected further hikes in its 1.5 percent main rate, Citi analyst Jaromir Sindel said in a note.

Pressure on markets in European peripheries make a 2 percent crown firming in the rest of 2018 unlikely, he said.

"The CNB (central bank) may continue to 'compensate' for EURCZK underperformance via a more aggressive front loading of policy rate hikes, in an attempt to get to its 3.0-3.25 percent benchmark of Czech neutral policy rate," he added.

Central Europe's economic fundamentals and the region's previously rapid but now slowing economic growth have been resilient despite a deterioration in some major emerging economies this year, noted Regis Chatellier, global sovereign credit analyst at Societe Generale.

Hungary's forint is supported by robust economic growth of around 4 percent and a sizeable though shrinking current account surplus, analysts said.

The forint can still not appreciate as Hungary's real interest rates are among the lowest in the universe of emerging economies, while a robust rise in wages across Central Europe has increased the country's inflation risks, analysts said.

The Hungarian central bank's main rate is the lowest in the region at 0.9 percent, compared with 1.5 percent in the Czech Republic and Poland, and 2.5 percent in Romania.

The poll sees the forint trading near 325 versus the euro in the next six months, weaker from Wednesday's six-week highs at 322.2.

But it could firm by the time the European Central Bank starts to increase its interest rates, probably about a year from now, analysts said.

"If the ECB starts to increase rates, the NBH (Hungarian central bank) will also need to react and that could strengthen the forint," said Noemi Holecz, analyst of Equilor brokerage in Budapest.

Poland's central bank, which kept interest rates on hold on Wednesday, may start to tighten interest rates even later than Hungary, analysts said.

But the zloty is still seen firming even slightly more than the forint as Poland's inflation, which ran at 1.8 percent in September, is well below Hungary's levels above 3 percent.

The leu is expected to weaken even though the Romanian central bank increased interest rates three times this year to fight inflation which exceeds 5 percent.

On Wednesday the bank held fire and its Governor Mugur Isarescu reiterated that inflation could fall to the top of the bank's 1.5-3.5 percent target range - which is identical with Poland's goal - by the end of the year.

(Other stories from the global foreign exchange poll: ) (Additional reporting by Indradip Ghosh and Sarmista Sen in Bengaluru and Jason Hovet in Prague; Editing by Hugh Lawson)

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