By Jason Hovet and Dagmara Leszkowicz
PRAGUE/WARSAW, July 8 (Reuters) - Strong appreciation by the
Czech crown and Polish zloty has eased pressure on their central
banks to raise interest rates, policymakers said on Tuesday, a
sign of a possible end to tightening in the region.
In aggressive moves to combat surging inflation, Poland's
central bank has upped rates eight times since April 2007 to 6
percent, while the Czech bank has put five hikes in place,
bringing the main rate to 3.75 percent, still the lowest in
Europe.
But after the currencies of the two recent European Union
entrants climbed to all time highs this week, central bankers
from both countries said this was helping to fight inflation.
"If the zloty remains close to current levels, then the
future path of inflation would be lower and the scope for rate
hikes would be smaller, especially this year," Polish Monetary
Policy Council (MPC) member Darius Filar, usually a hawk, told
Reuters by telephone [].
Czech central banker Vice Governor Miroslav Singer went even
more dovish, saying the strong crown <EURCZK=> could slash
inflation to below 2 percent by next year, leaving open the
possibility of a rate cut.
"The current exceptionally strong exchange rate of the crown
... could lead to a dramatic drop in domestic demand and to a
corresponding marked drop of inflation, even below the levels of
the new target," Singer wrote on Web site www.ekonom.ihned.cz.
"We will know more when discussing the new forecast at the
beginning of August," said Singer, who voted for stable rates in
the central bank's past three meetings [].
Data on Tuesday showed Czech inflation slowed to 6.7 percent
in June after a January peak of 7.5 percent, although the
central bank expects it to briefly tick up above 7 percent again
in the summer and autumn on rises in tobacco and heating prices
[].
The central bank has said crown strength is the main reason
it has kept the main two-week repo rate flat at 3.75 percent
since the last in a series of hikes in February.
According to a Reuters poll, analysts expect Poland's MPC to
leave interest rate hikes on hold through August but think it
may resume tightening in September. The market has also priced
in hikes in Czech rates, according to forward rate agreements.
DENTING GROWTH
The Czech crown touched a record 23.455 to the euro
<EURCZK=> on Monday before easing back to 23.610 on Tuesday. It
has firmed 10.4 percent since the start of 2008.
Following the better than expected June inflation figures,
the central bank was being aided by the crown "which is
beginning to act in a strongly anti-inflationary direction".
In the region's largest economy Poland, the zloty <EURPLN=>
has added 8.8 percent against the euro this year. It hit a fresh
high of 3.2990 per euro on Tuesday, pouring fuel on concerns
that it is hitting the country's economic competitiveness.
Miroslaw Pietrewicz, an MPC dove, told Reuters the central
bank should avoid rate hikes until at least October because
expectations of more tightening were fuelling zloty gains as
investors pour into the region seeking high returns on rate
instruments.
"If the zloty continues to appreciate there are fears growth
may stop at this level (4 percent) ... It is possible growth may
even fall below 4 percent (in the fourth quarter)," he told
Reuters. Poland's economy grew by 6.1 percent in the first
quarter.
Analysts said the comments supported the view that the
tightening cycle could be nearing an end, although central banks
had yet to conquer price growth.
"Maybe rates will not have to be hiked as much as previously
expected... (But) inflation is still a problem in the region,"
said Jon Harrison, an FX strategist at Dresdner Kleinwort.
(Writing by Michael Winfrey and Jason Hovet; Editing by Ruth
Pitchford)
