* Hungary CPI in line, Romania's above forecasts
* Central banks in policy dilemma across region
By Balazs Koranyi
BUDAPEST, April 10 (Reuters) - Inflation eased in Hungary
and Romania in March, opening the way for possible interest rate
cuts, but price pressures ahead and currency weakness are posing
policy dilemmas for most of the region's central banks.
Data on Friday confirmed a trend in central Europe of
decelerating inflation due to the global economic crisis which
is forcing nearly all of the region's economies into recession
and deflating consumer demand.
But the countries are also struggling with weak currencies
and fragile financial stability, which could keep their central
banks' hands tied when it comes to lowering rates.
Hungarian inflation eased to 2.9 percent year-on-year in
March from 3.0 percent in February, in line with expectations.
[]. Romania's rate slowed to 6.7 percent, from 6.9
percent, but this was above forecasts of 6.5 percent
[].
Analysts said the Hungarian data, the lowest inflation
reading in nearly three years, would still prevent the central
bank from cutting rates.
On the other hand, Romania was likely to go ahead with a cut
in May but the higher-than-expected March data raised some
questions and could put a cut into doubt, they said.
In the Czech Republic, which reported higher-than-expected
March inflation of 2.3 percent on Thursday [], a
rate cut could be postponed, while in Poland, markets remain
split over their short-term rate outlook.
For most central banks, the strength of their currencies is
likely to clinch the vote as lower rates could mean weaker
exchange rates and higher imported inflation.
It could also scare off portfolio investors who finance
their debt and lead to further currency weakness. This may upset
financial sector stability because weaker currencies hurt the
many people in Poland, Hungary and Romania who have borrowed
heavily in euros and Swiss francs.
HUNGARY ON HOLD, ROMANIA TO CUT
Prospects for the EU's eastern members, which have been an
engine of economic growth in recent years, have slid since late
last year as worries about external financing and an evaporation
of capital in the credit crunch have taken their toll.
Hungary, Latvia and Romania have all already sought aid from
the IMF, but hopes have grown that a recent decision by the
Group of 20 to inject funds into the IMF could help to draw a
line under the region's troubles.
"Monetary policy-wise, inflation is of less importance. The
National Bank of Hungary's top priority remains financial
stability," said CIB bank analyst Mariann Trippon.
"The forint has recovered nicely, but volatility is still
high, thus we expect the central bank to keep the policy rate on
hold at the next rate-setting meeting in spite of the darkening
growth outlook and more or less positive inflation
developments."
In Romania, where the central bank will next meet on May 6,
analysts are still expecting a rate cut but some point to upside
inflation risks which could limit the scope for reductions.
"The figure is not positive, because it is above
expectations again. We cannot expect a pronounced relaxation of
monetary policy this year," Nicolaie Alexandru-Chidesciuc at ING
said. "Monetary policy decisions are complicated because you
have recession on the one hand and high inflation on the other."
In Poland, the region's biggest economy, analysts expect the
central bank to ease rates on April 25 but nearly as many
analysts expect rates to remain on hold [].
Those on the side of caution got a boost this week when
Polish rate setter Andrzej Wojtyna said rates should stay
unchanged.
