Zloty, forint halt gains, focus turns to Polish central bank meeting next week

BUDAPEST: Central European currencies held stable on Friday, bringing this week's steady gains of the zloty and the forint to a halt as investors in the region are already looking ahead to the rate-setting meeting of the Polish central bank next week.

While most economists expect rates to remain unchanged on Wednesday, recent comments by governor Adam Glapinski that a rate-cut could be possible in the first quarter have introduced an element of uncertainty.

The second wave of the COVID-19 pandemic has hit Central Europe's economies hard, and some countries like the Czech Republic and Slovakia are battling a big spike in infections again. Hungary extended a partial lockdown until Feb 1.

Nonetheless, the launch of vaccinations against COVID-19 fuels hopes for a global economic recovery in 2021, which could lead to Central European currencies firming this year, with the zloty and Czech crown leading gains, a Reuters poll showed on Friday.

The zloty was flat on the day to trade at 4.5185 versus the euro.

According to the Reuters poll, the zloty could strengthen almost 3% over the next year, but some analysts urged caution after last month's interventions by central bank to weaken the currency to help exports.

"The market will remain moderately cautious in the pressure on the appreciation of the Polish currency, at least until the next meeting of the Monetary Policy Council," Bank Millenium said in a note.

"We now expect the NBP to cut its key policy rate by 10bp to 0% in 1Q21, most likely at the March meeting," Morgan Stanley said. "However, if PLN appreciates strongly, there is a risk that the NBP might decide to deliver a cut earlier than that."

Further interventions to weaken the zloty could have a downside effect on the forint and a Polish rate-cut could prompt the National Bank of Hungary to take a similar step, FX traders in Budapest said.

"Investors have always traded the zloty and the forint together, and since the EU budget veto, the connection has been burned into their minds even stronger," one trader said.

The forint was up 0.11% and trading at 359.85 versus the common currency on Friday.

Hungary's industrial output rose by an annual 3.5% in November, based on data on Friday, as output in major branches of manufacturing expanded, but the economic rebound this year looks slower than previously expected.

In the Czech Republic, working day adjusted industrial output rose by a lower-than-expected 0.4% year-on-year in November.

Stocks in the region firmed, with equities in Prague and Budapest at levels last seen in February 2020.