BUDAPEST: The zloty eased slightly on Wednesday after the Polish central bank governor said interest rate cuts could not be ruled out as inflation remains low even though the economy is picking up.
Central European rate setters have followed the dovish shift in European Central Bank rhetoric in recent weeks due to low euro zone inflation, adding to a fall in debt yields in the European Union's lower-rated markets.
Polish central bank chief Marek Belka had said just two months ago that rate cuts would be a "deadly sin".
But on Tuesday he appeared to make a U-turn, saying after the bank kept its main rate on hold at a record low that low inflation levels had kept surprising the bank.
"So the deadliness of this sin would now seem lower," he told a news conference.
Nevertheless, the zloty eased just 0.1 percent against the euro on Wednesday.
Jakub Borowski, chief economist of Credit Agricole in Poland, said a rate cut may only come in September or October if inflation remains low as expected.
"An alternative option, namely interest rate cut as early as in July 2014 (in reaction to the results of the July inflation projection, which will surely confirm a high risk of temporary deflation in Q3), is in our opinion hardly likely," he said.
One Warsaw-based dealer said the zloty should in theory weaken after Belka's comments but seemed to only track the drop in other emerging markets currencies.
That may be because expectations that the ECB will cut rates and even announce monetary stimulus measures on Thursday have supported its currencies and also helped a rally in the region's debt markets in recent weeks.
"I expect that there is room for gains in the zloty. The key factor is the ECB meeting tomorrow," the Warsaw dealer said.
One trader said the debt market gains may be overdone in Hungary, where bond yields hit record lows early this week. The three-year benchmark yield rose eight basis points to 3.31 percent, while Polish bonds firmed slightly.
"There is a good supply at today's switch auction and the (debt agency) AKK has increased its bond sales," one Budapest-based fixed income trader said. "Therefore I am not sure that the ECB meeting will be followed by further bond firming here."
The forint eased 0.1 percent to the euro to 305.50. OTP Bank shares fell another 1.5 percent after Tuesday's court ruling on a foreign currency loan contract, which may lead to losses for Hungarian banks.
The leu weakened 0.2 percent versus the euro in Bucharest, pushing it out beyond 4.4. The International Monetary Fund is in Romania to review its 4 billion euros precautionary stand-by credit deal with the country.
Prime Minister Victor Ponta said planned hikes in defence budget spending in the country, which neighbours crisis-hit Ukraine, will impact the fiscal deficit target for this year.
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