* Market pricing may be too ambitious on rates outlook
* Hungary, Czech rates to follow in first half 2011
* Divergence in policy favours zloty vs CEE peers
By Jason Hovet
PRAGUE, Nov 19 (Reuters) - Poland will be the first country
in the European Union's eastern wing to start to reverse two
years of record loose monetary policy, but investors have begun
to think twice about the pace of easing currently expected.
Above-forecast growth and a pickup in consumer activity will
also lead to tightening in Hungary and the Czech Republic by the
middle of next year, analysts say, although the pace of rate
hikes will not be quick.
Poland is the region's only country with much inflationary
pressure and there had been signs of a swing among policymakers
needed to force through at least a small 25 basis point rise
after August's 6-4 vote against a larger 50 bps move.
But two of the central bank's perceived policy hawks have
since signalled more doubts, and forward rates -- showing where
investors think official borrowing costs will be in future --
have reined in bets of immediate tightening. []
With December traditionally a shortened working month in
which the Polish central bank does not change policy and the
euro zone economy expected to slow in the new year, the picture
by January could be less bullish.
Analysts still expect some tightening. The question is
whether it will be as much as the at least 100 basis points
factored in by forward rate markets in the next year.
"The pace that is currently expected by the markets is too
much," Warsaw-based BNP Paribas economist Michal Dybula said.
"(Markets) are going to be disappointed because of external
factors. The ECB is probably unlikely to deliver anything real
soon (on euro rates); on the local side, the zloty will stay
strong and there will be no inflationary pressure on the core
readings."
The contradictory MPC comments, however, have left some
still in doubt over next Wednesday's decision. A Reuters poll on
Friday showed 10 of 18 analysts forecast no change in the bank's
main rate -- now at a record low of 3.5 percent -- while the
rest expected a 25 basis point rate rise. []
REGIONAL ADVANTAGE
Poland's stronger growth outlook means the flood of cheap
money flowing from the U.S. Federal Reserve's quantitative
easing has tended to favour the zloty over its peers. A rise in
local rates, after 16 months unchanged, would only reinforce
that, particularly denting appetite for Czech crowns.
On the flip side, any pull back in the scale of tightening
expected could harm the Polish currency <EURPLN=> and the zloty
has handed back around 3 percent of this year's gains since
peaking in April.
Most analysts have forecast Polish rates to rise 50-100
basis points by the end of 2011. The 6x9 forward rate agreement
(FRA) <PLN6X9F=>, indicating 3-month interest rates in six
months time, was quoted at 4.50 percent on Friday, down 5 basis
points from Tuesday but signalling a series of hikes.
RBC strategist Nigel Rendell said pricing in the markets was
steep. "We would probably be receivers in Poland just because so
much is priced into the curve already," he said.
RBC took profit last week on a long zloty versus the Czech
crown trade after a selloff connected to U.S. dollar firming,
although it said the zloty would continue to firm against the
crown due to the divergence in monetary policy outlooks.
FLOWS, DIVERGENCE
The Czech central bank's new forecasts this month put the
prospects of rate tightening from a region-low 0.75 percent off
until later in the second half of 2011 year due to the expected
economic slowdown caused by government budget cuts next year.
Analysts expect the bank to move as early as mid-2011 --
faster than forecasts imply due to firmer manufacturing and
domestic demand. Markets are pricing a rise in six months time.
In Hungary, where rates are at a record low 5.25 percent,
the central bank's new forecasts this month will factor in the
government's budget-saving tax and pension changes, which the
bank has said signalled a rise in domestic inflation.
Nomura economist Peter Attard Montalto said that in Hungary,
a country trying to climb out of a steep 2009 contraction and
tackle one of the highest debt loads in the region, a hike could
make for a better recovery by helping households with foreign
currency debt.
As the government tries to rebuild market confidence after
shocking investors with a string of measures including "crisis
taxes" on banks and other industries and rolling back pension
reforms, higher rates could help strengthen the forint currency.
The forint is 16 percent weaker to the euro since a record
high in mid-2008 and 30 percent down against the Swiss franc,
which has hammered mortgage holders since a majority of housing
loans are taken out in the Swiss currency.
"They can normalise policy even under a weak growth outlook
pretty soon in the first quarter next year," Montalto said.
(Editing by Patrick Graham)
