The crown is expected to gain almost 2 percent against the euro in the coming year as the Czech central bank keeps raising interest rates to fight inflation, a Reuters poll found. According to a March 1-6 Reuters poll of analysts, the crown is expected to strengthen to 25.185 versus the euro in a year from its mid-Wednesday level of 25.620.
The Czech central bank, Central Europe's most hawkish, raised its main rate five times in 2018 to 1.75 percent, before pausing in December and February. Its next meeting is on March 28, a day before Britain is due to quit the European Union. Rate setter Tomas Holub has said that Britain exiting without an agreement with the EU could prompt a delay in further tightening, but one or two rate increases remain possible this year.
Another rate setter, Ales Michl, has said it could be a reason not to lift rates if an economic slowdown in Germany, a key export market of the region, worsens.
Growing certainty over the details of Brexit and better economic data from the euro zone could help the crown appreciate, analysts said. "With naturally stronger koruna (crown), there may be no need to hurry with the interest rate hike in March," said Jan Bures, the chief economist of Patria Finance.
An economic slowdown in the euro zone will be closely watched for threats to the region's exports and a delay in the European Central Bank's monetary tightening, which makes Central Europe's assets relatively more attractive. The slowdown is likely to affect the region's economies, but Czech output expanded faster in the fourth quarter than the central bank expected, at a 2.8 percent annual rate. Polish and Hungarian growth is near 5 percent. Inflation trends, however, have diverged in the region.
Rising inflation in Hungary has led to a hawkish shift in the central bank's rhetoric after seven years of loose policy. Polish inflation, on the other hand, was running at a 0.9 percent annual rate in January, well below the Polish central bank's 1.5 to 3.5 percent target range. Poland's central bank left interest rates unchanged on Wednesday. The Hungarian bank is widely expected to start to tighten liquidity at its meeting on March 26.
"There will be no huge monetary policy turnaround," said Orsolya Nyeste, an analyst at Erste Group in Budapest. "We could call it a shift to 'loose' from 'ultraloose' ... and the narrowing trade surplus will weigh on the forint." The median estimate of analysts in the poll foresees 0.6 percent strengthening in the forint against the euro in the next 12 months to 317.5. The zloty is seen gaining 1.1 percent to 4.255.
A fiscal stimulus plan announced by the Polish government late last month could have inflationary impacts. The Polish central bank is unlikely to raise rates this year but may start next year, analysts said. The zloty's expected gains over the next year would only help it catch up with the forint, which has outperformed this year, gaining about 1.8 percent.
The leu has been the worst regional performer. It has shed almost 2 percent since December as the government shocked markets with new taxes on banks and energy firms and other measures. Even though the government is expected to change some of those measures, the leu is forecast to weaken 1 percent to 4.795 versus the euro in the coming year.
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