* Markets price in too many rate hikes by end-year
* Analyst polls see less tightening
* Inflation worry may ease some, economies still fragile
By Jason Hovet
PRAGUE, Feb 2 (Reuters) - Czech and Polish forward rate
curves may flatten in coming months as markets scale back their
pricing of aggressive monetary tightening.
Czech forward rate agreements (FRAs), used to hedge interest
rate exposure, have priced in at least three official interest
rate hikes of 25 basis points each by end-year. The Polish FRA
market is counting on at least four such hikes in 2011.
But the latest Reuters polls of analysts, published on Jan.
24, project only a 50 bp Czech rise in the next 12 months and
another 50 bps in Polish hikes this year. []
[]
The Polish central bank lifted its base interest rate to
3.75 percent in January, the first rise in more than two years,
following the Hungarians, who have delivered three quarter-point
hikes to 6 percent since November.
The Czechs, with rates at 0.75 percent, below the European
Central Bank's 1.0 percent, have yet to start tightening but
analysts and the market expect it to do so by the middle of the
year.
Still, analysts argue that currency appreciation, stuttering
demand and high unemployment will temper monetary tightening.
The Hungarian rate curve has already flattened with at most
one more rate hike seen, probably before the government, which
has criticised the bank's rate increases, gets power to appoint
four new members to the Monetary Council in March.
The Czech and Polish curves may also be poised to flatten,
making receiving fixed rates on the longer end of the curves
more attractive.
"Given that there is so much priced in in Poland, we
would recommend receiving 9x12 or 12x15 (forward rate
agreements)," BNP Paribas said in a Jan. 28 report. In a 9x12
FRA, the two parties exchange fixed and floating interest rates
for a period starting nine months from now and ending 12 months
from the present.
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*Graphic on market pricing click http://r.reuters.com/naw77r
*For graphic on inflation click http://r.reuters.com/cyr77r
*For a story on regional monetary policy: []
*For more stories on policymakers, inflation:[]
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While Polish inflation has been rising, some policymakers
have spoken of it topping out later this year. RBC strategist
Nigel Rendell said Polish policymakers would likely stay
cautious on interest rate rises in order not to disrupt economic
recovery.
"As long as inflation is coming back down again, then maybe
50 bps (in hikes) will be enough; maybe then another 25 at the
end of the year just for good measure," he said.
CZECH WAIT
The Czech central bank meets on interest rates on Thursday.
No analyst forecast a rate change in the Reuters poll, but the
central bank's new forecasts will likely predict higher economic
growth and increase hawkish rhetoric.
Rates on Czech 6x9 FRAs have risen 11 bps this year to 1.64
percent, suggesting firm expectations for a rate hike in that
time and sooner than the central bank's last forecast implied.
But Czech and Polish policymakers have strong currencies to
help fight inflation. The Czech crown <EURCZK=> has gained 9.5
percent against the euro since the start of 2010. The zloty
<EURPLN=> is up 5 percent.
Komercni Banka said Czech rate setters would go slow on
tightening and stay tuned to external pressures, including
still-bubbling worries over the euro zone's debt problems.
"The market expectations of three hikes by the end of this
year are, according to our view, too optimistic," it said in a
Jan. 26 report.
The bank recommended last month receiving fixed rates in a
two-year interest rate swap <CZKAM6PR2Y=> while paying 6-month
PRIBOR <CZK6MD=> because it felt Czech markets were pricing in
too much monetary tightening.
(Editing by Andrew Torchia)
