By Sandor Peto
BUDAPEST (Reuters) - Tighter monetary conditions will strengthen the Czech crown and Hungarian forint in the coming year and help them outperform Central European peers, according to a Reuters poll of 37 analysts.
A surge in wages has boosted economic growth in the region, accelerating inflation, in contrast with a slowdown in the euro zone. Regional interest rates could stay stable or rise, also against expectations for the U.S. Federal Reserve to cut rates.
Those expectations have weakened the dollar and increased appetite for Central European currencies, boosting them to multi-week highs versus the euro in the past weeks.
The Romanian leu has reached 4-month highs but remained the year's worst-performing unit in the region, with a loss of about 1.5%. Romanian markets have been hit by unpredictable fiscal policy and growing economic imbalances.
According to the median forecast in the May 30-June 4 poll, the leu will ease almost 2% in the coming year to 4.82 versus the euro.
The crown, meanwhile, is expected to strengthen by 1.4% to 25.315 relative to mid-Wednesday levels.
"It is all about the twin (budget and current account) deficits," said Ciprian Dascalu, chief economist at ING Bank in Bucharest. "Romania's twin deficit is diverging from regional trends."
Romania was the only European Union member, along with Hungary, where annual economic growth reached 5% in annual terms in the first quarter, followed by 4.7% in Poland.
Rising wages have boosted Hungary's and Romania's inflation and imports. But Hungary still has a current account surplus and plans to halve its budget deficit next year.
The Hungarian central bank (NBH) is unlikely to increase the region's lowest benchmark rate of 0.9% any time soon, but is expected to let interbank interest rates rise gradually.
That could help the forint firm by 0.5% to 320 versus the euro in the next three months and stay there at least until the middle of 2020, according to the survey.
The forint, having no cushion from interest rates, may still face significant swings between 310 and 330, analysts said.
A further rise in core inflation, if it comes in a period of global risk aversion, can hit the forint.
The main global risks to regional currencies are a escalation of the United States' trade wars or if the expected Fed rate cut does not materialize, analysts said.
The crown should receive support from attractive interest rates after the eight hikes delivered by the Czech central bank in the past two years, and given the possibility of further tightening, market participants said.
"The Czech economy still reports solid GDP growth but overheating is not a big issue anymore," said Radomir Jac, chief economist at Generali (MI:GASI) Investments CEE in Prague, adding that the Czech Republic had a slight current account surplus.
Raiffeisen analyst Eliska Jelinkova differed.
She forecast a weakening of the crown to 26.47 against the euro by May 2020, saying any strengthening would be followed by a selling by foreign investors who are sitting on huge crown positions.
"As the end of monetary policy tightening has probably come, we do not expect much more support for the koruna (crown) from this side," she said.
The poll projected a mild weakening of Poland's zloty to 4.29, and a 0.9% easing of Serbia's dinar to 118.8.
Analysts said Polish inflation may rise further, but not enough for the central bank to change its record low interest rates.
In Serbia, the central bank has been selling the dinar to stem its gains, partly caused by a buying of Serbian government bonds by foreigners.