BUDAPEST/WARSAW: The zloty led a cautious firming of Central European assets on Wednesday ahead of a meeting where the Polish central bank is seen keeping interest rates on hold.
Analysts said that last month's zloty fall to a 4-year low past 4.51 against the euro, after Poland's surprise downgrade by S&P, was a strong argument against further rate cuts.
The zloty has recovered since as dovish ECB comments and Japanese monetary loosening helped regional assets, and traded at 4.397 at 0917 GMT, firmer by 0.2 percent from Tuesday.
Most analysts still think that the bank will not need to cut rates even though new rate setters appointed by the pro-growth government will be in a majority on the Monetary Policy Council by March.
Even without further easing, the Polish economy is seen continuing to lead robust economic growth in European emerging markets, which also helps shield Central European assets against global market jitters, analysts have said.
Regional markets remained mostly resilient to a continuing decline in crude prices and Asian stocks on Wednesday as some investors look at the region as a safe haven, market participants said.
"We (the region) are bullet-proof," one Budapest-based currency dealer said.
The prospect of high growth and stable interest rates could boost appetite for long-term Polish government bonds at an auction on Thursday, which will be "the first litmus test in terms of foreign risk appetite following the surprise rating downgrade," Raiffeisen said in a note.
The yield on Polish 10-year benchmark bonds dropped one basis point to 3.157 percent. Polish bonds offer a wide spread over corresponding German papers.
"There's zero yield on 10-year Bunds while shorter Bund yields are even lower, so where can you put your money in? Countries of our region look good because they will not lose on cheaper oil, they can only benefit from it," said Piotr Poplawski, analyst at BGZ BNP Paribas in Warsaw.
"I think that the region may well gain further but I'd be cautious with the zloty, the problem of (a planned conversion of) CHF mortgages is a little ticking bomb," he added.
While Raiffeisen said Polish forward rate agreements were likely to price out the 25 basis point central bank interest rate cut which they project for the next 3 months, RBS analysts said a reduction was still likely in March.
"By the time of the meeting, new members will dominate the Council and the outcome of the 10 March ECB sitting, where additional stimulus is expected to be delivered, will be known," the RBS analysts said in a note.
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