RPT-C.Europe eyes rate rises as political tensions build

(Repeating story first filed on Friday, Sept. 22)

By Patrick Graham

WARSAW, Sept 22 (Reuters) - Only one of central Europe's four big economies looks set to raise interest rates in decisions this week, but rising inflation and political nerves across the region look set to ensure tightening in months ahead.

Reuters polls show analysts are only sure of a rise in borrowing costs this month in the region's sick-man Hungary, where anti-government riots have weakened the forint amid concern over medium-term price pressures.

A majority of economists expect banks in Slovakia and the Czech Republic to hold fire till later this year, although some do back hikes already this month. In Poland most analysts favour a first rise in record-low borrowing costs early in 2007.

All four countries are facing steady rises in inflation because their economies are easily outpacing western Europe's.

But analysts say a coalition collapse in Poland and riots in Hungary are also playing a role because they are weighing on those countries' currencies.

"These countries were able to cut strongly thanks to strong currencies," said Robert Beange, regional economist with Lehman Brothers in London. "Because that is now evaporating, monetary policy is being rebalanced to compensate."

"It's emerging market bearishness hurting these currencies, but tensions in Hungary and Poland are part of that."

GOVERNMENT LIES

A far-right rally planned for Friday has raised fears of more riots in Hungary after days of protests against Prime Minister Ferenc Gyurcsany, caught admitting on tape that his party lied to win another term in April elections.

The crisis is just the latest for a leftist cabinet implementing austerity measures to avoid a downgrade of its debt ratings and further delays on its road to the euro.

Budapest's central bank has raised its base borrowing rate, now at 7.25 percent, by a total of 125 basis points since June to fight the inflationary impact of tax and price increases imposed by the government.

After this week's 2 percent drop for the forint and warning shots on ratings from the Fitch agency, some analysts say Monday's hike may even be an aggressive half percentage point.

"The sense of crisis from the protests and Fitch's move increases the risk that the NBH will pull a 50 basis point hike out of the bag," said Martin Blum, head of regional strategy for Bank Austria in Vienna.

COALITION COLLAPSE

The collapse of Poland's ruling coalition on Thursday also drove the zloty close to two-month lows, but with a balanced current account and inflation that has been the lowest in the EU for months, policymakers are still in a comfortable position.

On the fiscal side investors have been comforted by the ruling conservatives' commitment to hold the budget deficit steady in nominal terms next year. August's rise in inflation also looks strictly due to a temporary jump in food prices.

"None of the political changes we may see should have any impact on the central bank council -- as long as the zloty does not dramatically fall," said Grzegorz Maliszewski, economist with Bank Millennium in Warsaw.

"While inflation may rise, all signs are core price pressure is not increasing. There is no need to hike yet."

Both Czech and Slovak central banks look most likely to wait for new inflation projections due next month before adding to rate tightening begun earlier in the year.

The Czechs have the lowest rate in the region at 2.25 percent and many analysts were still wavering over whether they would move again already this month after the crown dipped two percent and August inflation rose faster than bank projections.

"The result will be very narrow, something like 4:3 against a rise," said David Navratil, analyst with Ceska Sporitelna. "The likelihood of a hike versus stability is 40 percent in September, 90 percent in October."

-- with reporting by Jan Lopatka in Prague. ((patrick.graham@reuters.com, tel. +48 22 653 9718; editing by David Christian-Edwards))

Keywords: ECONOMY EUROPE RATES