* Central European monetary tightening to be moderate
* Inflation ex-food, energy remains low
* Weak demand, high unemployment limit internal CPI pressure
* Appreciating currencies mitigate high commodity prices
By Michael Winfrey
PRAGUE, Feb 2 (Reuters) - Currency appreciation, stuttering
demand and high unemployment, among other factors, will limit
monetary tightening by central banks in Poland, Hungary and the
Czech Republic despite rising global inflation.
Investors are pricing in interest rate hikes in Poland as
early as March, and market watchers expect Czech policymakers to
raise the cost of borrowing at around mid-year.
But because inflation in those countries has been driven
mainly by increases in food and fuel prices -- imported effects
that monetary authorities in central Europe's small, open
economies are not well-equipped to tackle -- sustained campaigns
of rate hikes are unlikely.
And despite better-than-expected fourth-quarter economic
growth across the region, domestic demand has yet to match
double-digit spikes in industrial production, meaning underlying
price growth is subdued.
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*For graphic on inflation click http://r.reuters.com/cyr77r
*For a story on market pricing of rate hikes: []
*For graphic on market pricing click http://r.reuters.com/naw77r
*For more stories on policymakers and inflation: []
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An example: Poland's December headline inflation hit 3.1
percent, above the central bank's 2.5 percent target. But
inflation excluding energy, food, alcohol and tobacco -- the
last two subject to regulatory price hikes -- was only 0.9
percent versus a year earlier.
In Hungary, the pared-down figure was 2.3 percent versus a
headline figure of 4.7 percent. It was just 0.1 percent for the
Czechs.
"Core inflation across the board has been low by any
standards," said Simon Quijano Evans, economist at brokerage
Cheuvreux. "I really don't think there is going to be an
aggressive rate hiking cycle."
The latest Reuters polls of analysts, published on Jan. 24,
project only a 50 basis point Czech rate rise in the next 12
months and another 50 bps in Polish hikes this year.
[] []
WEAK DOMESTIC DEMAND
Unrest in the Arab world, where meteoric food prices helped
stoke protests that toppled Tunisia's government and caused
shakeups in Egypt and Jordan, have put central banks across the
developing world on alert.
Food and energy are important to emerging Europeans too,
making up 30-40 percent of the Czech, Hungarian and Polish
inflation baskets versus only 20 percent for Germany, according
to the Organisation for Economic Cooperation and Development.
Hungary's central bank has raised interest rates by a
quarter of a percentage point three times in as many months to 6
percent. The Poles hiked a quarter-point at their last meeting.
Czech central bank Governor Miroslav Singer has echoed hawks
on his board by warning of rising price pressures, although he
also said the strong crown <EURCZK=> could help, and the central
bank is expected to keep rates at a record-low 0.75 percent at a
meeting on Thursday.
But other data do not necessarily support monetary
tightening. Poland's economy roared ahead by 3.8 percent last
year, but a 2.0 percent fall of gross fixed capital formation
has prompted some analysts -- and some rate-setters -- to
suggest there is no need to raise the cost of borrowing quickly.
And jobless rates are still very high. Polish unemployment
rose to 12.3 percent in December from 11.7 percent a month
earlier. Czech unemployment jumped to 9.8 percent. Hungary's
jobless rate was 10.7 percent in November.
"Domestic demand pressure is just not there," said emerging
Europe economist Raffaella Tenconi from Merrill Lynch Bank of
America. "Unemployment rates are still very high across the
board, and that is the key factor...that is not motivating
aggressive monetary pressures at this stage."
Romania, where an embattled government is struggling to push
through reforms, is actually expected to cut interest rates by
half a percentage point to 5.75 percent by the year's end.
CURRENCIES, POLITICS
One of the most important factors mitigating the cost of
imported fuels is the region's surging currencies.
The Czech crown has gained 20 percent against the dollar
since July 1, when global grain prices began their upward surge.
Poland's zloty <PLN=> is up 18.4 percent and Hungary's forint
<HUF=> 17.4 percent.
That beats smaller gains in many Asian and Latin American
currencies, and helps to offset a 30 percent rise in the Goldman
Sachs commodities index <.SPGSCI> and a similar rise in crude
oil <LCOc1>.
So far no policymakers have expressed serious concern about
currency levels -- Polish rate setters have even said they see
more room for the zloty to firm. This has boosted market
expectations that authorities in those countries will continue
letting currencies take some of the edge off price growth.
"All of the monetary policy councils have been focusing on
currency strength as a way to combat imported inflation and
inflation in general," said Elisabeth Gruie, a regional
strategist at BNP Paribas.
Other issues are also in play. Czech policymakers say
government austerity measures are dampening demand, and in
Hungary, Prime Minister Viktor Orban is preparing a March revamp
of the central bank's board in a way most economists expect to
lead to easier monetary policy to support his pro-growth aims.
Some analysts say the bank has therefore tried to front-load
tightening and could potentially hike again if it feels Orban --
who has repeatedly criticised the bank for tightening -- is
determined to name a new board that will reverse the moves.
"These comments (from the government) create the environment
that monetary policy needs to be even stricter, because with
smaller steps you're not achieving the result if somebody
creates the perception that this might be reversed," central
bank Governor Andras Simor told the Financial Times.
Analysts predict Hungary's forint will hold on to its gains
against the euro this year if a budget deficit-cutting package
expected from Orban this month satisfies market expectations for
cuts of at least 600 billion forints by 2013.
But if the deficit plan is not convincing, economists say it
could prompt rating agencies to lower Hungary's credit rating,
now one notch above junk. This would weigh on the currency and
potentially leave room for another interest rate hike.
(Edited by Andrew Torchia)
