By Krisztina Than
BUDAPEST, Feb 19 (Reuters) - A crisis of confidence in
emerging eastern Europe looks likely to make the region's
central banks slow down or halt cuts in interest rates, despite
mounting concerns over economic growth.
Policymakers face a dilemma after their currencies dived to
multi-year lows this week due to a bleak economic outlook and
financing concerns, while rating agencies' warnings over the
health of the region's banks triggered a sell-off in bank
stocks.
The Hungarian central bank is next to meet on Monday and
most analysts in a Reuters poll said they expected the main base
rate to stay unchanged at 9.5 percent <NBHI>, after rate cuts
totalling 200 basis points since November [].
Budapest's answer to a currency crisis last year had been to
jack up the return -- by 300 basis points -- that investors get
for holding forints. Some Polish policymakers have also advised
slowing down with easing and Czech Deputy Governor Miroslav
Singer told a newspaper on Wednesday the issue was whether to
raise rates, and by how much.
"Worries regarding increased inflationary pressures and the
implications for financial sector stability as a result of the
sell-off in CEE currencies are beginning to overshadow growth
concerns," Danske Bank said in a note.
"This means that the easing cycle in CEE countries is likely
to be coming to an end faster than we previously thought and
faster than is presently discounted by markets."
GROWTH COLLAPSE
The problem is that dismal industrial output data and
plunging exports show the global crisis is hitting the region
much harder than previously expected and that clearly warrants
further monetary easing.
The Czech central bank slashed rates by 50 basis points to
1.75 percent on Feb. 5, bringing the cost of money 25 basis
point below the European Central Bank's (ECB) benchmark rate,
but Governor Zdenek Tuma said that might be almost the end.
In Poland, most analysts in a Feb. 10 Reuters poll projected
a 50 basis point cut at next week's meeting, but some analysts
say now that a sharp sell-off in the zloty may prompt the
central bank to hold fire or decide on a smaller cut.
"In Hungary and Poland ... rates are likely to remain on
hold this month despite a recent run of awful data on the real
economy," Capital Economics said in a note.
"(But) while the pace of cuts may ease, we are sticking to
our call for rates to fall to record lows across the bulk of the
region by the second half of this year."
The zloty <EURPLN=> has lost about 12.5 percent versus the
euro so far this year, the forint has dropped roughly the same,
while the Czech crown <EURCZK=> has weakened about 6.8 percent.
Rising concerns over financial stability, households'
foreign currency debt or currency options held by some Polish
companies, have also become issues.
"The rise in (the cost of) Hungarian credit default swaps as
well as the complete disintegration of the bond market show that
this is not speculation-driven forint weakening, the market is
genuinely concerned about the Hungarian economy and the state of
its finances," 4CAST analyst Gabor Ambrus said.
The pace of easing is likely to be slower in Hungary, whose
large FX debt stock and state debt makes it more vulnerable than
its peers, and its southern neighbour Romania, where much will
depend on what role the International Monetary Fund may play to
prevent financial crisis.
Budapest central bankers have said that although the
inflation and growth outlook would warrant further rate cuts,
the bank must watch risks to financial stability.
According to the median forecast in a Reuters poll the
Hungarian base rate can fall to 7.5 percent by the end of 2009,
but forecasts moved in a wide range between 5 and 10.5 percent,
indicating great uncertainty.
(Reporting by Krisztina Than; editing by Patrick Graham)
