* ECB rate hike will not prompt knee-jerk reaction in CEE
* History shows higher ECB premium not big risk to forex
* Poles to hike as already forecast before Trichet comments
* Hungarians seen on hold, Czechs seen hiking by mid-year
By Michael Winfrey
PRAGUE, March 15 (Reuters) - Low core inflation and the need
to concentrate on fragile domestic recoveries are likely to
insulate the European Union's eastern members from the euro
zone's unexpected lurch towards tighter policy.
Speculation of knee-jerk hikes across the region rose
earlier this month after European Central Bank President Jean
Claude Trichet signaled the bank could raise its cost of
borrowing in April.
But a look at rate developments over the last five years
shows domestic inflation, and not ECB moves, has been the main
policy driver in the developing countries east of the euro zone.
That does not mean Poland will hesitate to raise rates next
month due to rising price growth or the Czechs before mid-year.
But those moves were forecast before Trichet spoke and
economists do not expect them to be pushed forward, particularly
because the commodity price inflation that has caused the ECB to
shift focus has also not taken hold in the same way in a region
where currency strength against the dollar has blunted its bite.
"We look at ECB policy, but I have to state that our
decisions (...) are primarily, and almost solely, based on
evaluating the state and tendency of this economy," Czech
central bank board member Kamil Janacek told Reuters.
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For a graphic on interest rates: http://r.reuters.com/hex48r
For a Take-a-Look on European central banks: []
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A majority of analysts expects the ECB to raise rates by a
quarter point to 1.25 percent in April. Trichet signaled such a
move would not start an extended cycle but the market expects
two more hikes to 1.75 percent by year end. []
"We don't see any more aggressive rate policy hikes in
emerging Europe on the back of what's happening on the rest of
the continent," said Imran Ahmad, an emerging markets strategist
at RBS. "In most of these countries core inflation is relatively
well behaved."
WARSAW TO RAISE
Poland's Monetary Policy Council is seen as the bank with
the most room to tighten, having already raised rates in January
by a quarter point.
Market watchers now expect it to hike its 3.75 percent base
rate by the same amount next month and to 5.25 percent a year
from now. But many analysts say that forecast might be too high.
Danske Bank's head of research, Lars Christensen, said one
risk across the region would be if the ECB were to hike more
than expected, which could hit currencies slightly and hurt the
effect they have had by dampening inflation tied to high food
and fuel costs.
But he added that for now, most of any expected tightening
would come from domestic pressures, particularly in the region's
biggest economy Poland.
And even though consumer price inflation unexpectedly hit a
21-month high of 3.8 percent in January, net inflation -- a
measure closely watched by the central bank that excludes the
impact of regulated and other volatile prices -- was just 1.6
percent in December.
"There are significant signals that the National Bank of
Poland will hike, but it's all from domestic inflation. It's not
coming from the ECB," Christensen said. "The pass through from
the ECB to regional rates is not very high."
Hungary needs to maintain a high investment premium to keep
the forint strong despite a running clash between the central
bank and the right-wing government that has criticised the board
for not supporting its pro-growth economic policy.
The bank has raised the cost of borrowing three times since
November to 6 percent, citing government measures it says have
eroded the country's risk profile and fueled inflation.
Since the last hike, the government has replaced two
policymakers at the bank and will choose two more in a process
that will stack the seven member board with candidates that most
analysts expect to run relatively looser policy.
But so far the new members have suggested quick easing is
not in the cards, which has caused many analysts to rethink
their forecasts.
"I think they'll just stay on hold in the foreseeable
future," said Nigel Rendell, a strategist at RBC.
RESILIENT CZECHS
A cursory glance would suggest that the currency most at
risk of losing value would be the Czech crown.
Supported by interest rates of just 0.75 percent -- below
the ECB's -- it would face a full half point discount if the
Czech central bank refuses to chase ECB rates.
But the crown has firmed over 25 percent against the euro
since the start of 2005, despite Czech rates being below the
euro zone's for 53 of those 74 months. That included a period in
2007 when Czech rates lagged the ECB's by more than a point.
Now the Czech economy is also under pressure of a government
belt tightening campaign aimed at cutting the budget deficit.
Fourth quarter growth was just 2.6 percent year-on-year,
undercut by a 0.7 percent fall in household demand, while
inflation was just 1.8 percent in February, below the central
bank's target.
Janacek, one of a group on the council who narrowly failed
to force a rate hike in January, said there were already
domestic reasons for raising rates but any weakening of the
crown due to the ECB would not be a concern.
"If the crown weakened after this (ECB) step, and it would
probably weaken only slightly and in the short-term, exporters
would welcocme it," he said.
The latest Reuters poll shows 12 of 18 analysts see a rate
hike before mid-year, while a majority expects the two-week repo
rate to rise to 1.25 percent a year from now. []
(Editing by Patrick Graham)
