BUDAPEST: Central European currencies firmed and government bonds eased on Thursday after the Polish central bank cut interest rates the previous day by twice as much as expected but also said its rate easing was over.
The bank's 50 basis point cut in its main rate to 1.5 percent is expected to herald further rate easing in Hungary and Romania as inflation is around zero in most of the region and central banks want to stimulate economic growth.
But the central bank also sowed confusion about the outlook for the region. Investors now wonder how long rate cutting can continue in other countries if Poland, the region's biggest economy, has indeed finished easing.
The Polish zloty firmed 0.2 percent against the euro by 1518 GMT to 4.14.
Some analysts believe disinflation, slowing growth and a firming of the zloty may force the Polish central bank into a U-turn later this year.
"It may well end up a messy process to reverse course on this new form of pre-commitment," Nomura's Peter Attard Montalto said in a note. RBS agreed, saying said in a note "the Polish MPC might end up regretting this early commitment."
The Czech crown firmed half a percent to 27.325 against the euro. The Hungarian forint rose 0.7 percent to 304.90.
"If Moody's changes the outlook on its (junk) rating on Hungary's debt (in a review) tomorrow, that can lift the forint," said one Budapest-based dealer. "If the central bank starts to cut rates (on March 24), that can cause an easing."
Hungary's central bank is widely expected to resume rate cuts late this month. A Reuters poll published on Wednesday forecast the forint would ease in the coming months due to expected policy easing.
The Polish commitment to keep rates on hold drove up government bond yields in the region in early trade but they joined a drop in euro zone yields after European Central Bank President Mario Draghi detailed plans for asset buying.
Polish bonds fully recovered and Hungarian yields also dropped a few basis point, but Hungary's 5-year yield at 2.67 percent was still higher by 11 basis points from Wednesday after an auction of bonds attracted weak demand.
Raiffeisen said in a note that Hungarian bond prices would have room to strengthen further as the central bank has room to cut interest rates given that its benchmark rate is now 60 basis points above Poland's.
Euro zone member Slovenia's 10-year yield dropped 7 basis points to a record low of 1.043 percent.
The yield on Croatia's 10-year bonds was quoted 15 basis points lower at 3.31 percent, after Zagreb said it was in talks about possibly taking a loan from the United Arab Emirates, which local media said could be worth around $2 billion.
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