[BUDAPEST] Central banks in emerging Europe are expected to ease monetary policy further to stop their strengthening currencies from driving already anaemic inflation lower and potentially hurting growth.
Poland and Serbia cut rates early this month, and Hungary and Romania are expected to follow suit at the end of March.
"As a base case, we expect ... 60-75bps from Hungary and Romania by end-Q2, and more from Poland in H2," Commerzbank said in a note on Monday.
Other analysts are more cautious and expect Hungary and Romania to tread carefully with small cuts as they keep an eye on the global situation.
Central Europe's economic growth has outpaced the eurozone but could be even faster with lower interest rates and weaker currencies which could also nudge up inflation, now around zero, towards targeted levels.
The Hungarian central bank said last July it had finished cutting rates with its base rate at 2.1 per cent. But it probably does not like the forint hovering near the past year's strongest levels against the euro, and is now widely expected to resume monetary easing on March 24, analysts said.
A 20 basis-point cut is possible, said Erste Bank analyst Gergely Urmossy, which would be bigger than the 10-point cuts the bank had been making until last summer.
"If the current market volatility passes and the bank does not cut rates, the forint will surge," he said.
In Romania, capital inflows would buoy the leu even if the central bank cut rates a lot from the current 2.25 per cent, Commerzbank said.
Currencies in the region have been on a firming trend and more gains are expected, driven by the European Central Bank's bond buying and improving regional economic data, despite the fact that concerns the US may start hiking rates in June caused swings in regional asset prices this month.
Another factor supporting the region's currencies is the plunge in crude prices, which curbs inflation but improves these countries' trade balances.
In Poland, the region's biggest economy, currency intervention appears the more likely route to a weaker zloty than interest rate cuts. The central bank surprised the market earlier this month when it cut interest by a bigger-than-expected 50 basis points and then said there would be no more rate reductions.
While Polish forward rate agreements are not pricing in more rate cuts - most investors believe the bank will not change its mind - further gains in the zloty could make the bank regret its pre-commitment to keep rates on hold, some analysts said.
"3.90 is the level where the red lamp usually starts flashing (for the central bank that the zloty is too strong)," one Warsaw-based currency dealer said.
The zloty and the forint, after firming 3-4 per cent against the euro, have been stuck around 4.15 and 305 against the euro, respectively, in recent weeks.
Some traders and analysts said if the zloty were to surge, the central bank is more likely to respond with market interventions initially rather than rate cuts.
The Czech central bank is the odd one out, as its interest rates are already at zero.
But the Czech crown, a safe-haven unit, has also firmed in recent months and was trading around 27.29 against the euro on Monday.
Its steady rise towards 27 - the central bank cap level introduced in 2013 - has raised the possibility that the bank may be forced to defend it and thus keep policy relaxed by buying foreign currency.