By Sandor Peto
BUDAPEST (Reuters) - Central Europe's most liquid currencies are expected to strengthen in the next 12 months as central banks may move toward tighter policies to fight inflation.
According to an Oct. 19-31 Reuters poll of analysts, the Czech crown (EURCZK=) could gain 3.2 percent against the euro, firming to 25.095 from Wednesday noon levels at 25.9 that were near 3-and-1/2-month lows.
The zloty (EURPLN=) could strengthen by 2.8 percent to 4.215 to the euro and the forint (EURHUF=) is seen gaining 1.5 percent to 320.
The common cause is a likely retreat of the dollar (DXY) whose rally this year, coupled with a rise in U.S. interest rates, has weighed on currencies in emerging markets including the European Union's eastern economies, analysts said.
"We expect a rebound in EUR (EUR=) which should support the CE3-crosses," said Sandra Stiffler, analyst at DZ Bank, referring to the Czech, Hungarian and Polish currencies.
Forecasts for the euro's rebound hinge on expectations that the European Central Bank will start to increase interest rates from the autumn of 2019.
Central banks on the EU's eastern wing closely watch the ECB as higher euro zone interest rates could make their currencies relatively less attractive, and weakness can add to inflation.
A regional pick-up in inflation since 2017 and the U.S. Federal Reserve's interest rate increases have already weighed on regional currencies.
The crown (EURCZK=) has shed more than 1 percent against the euro this year, even though the Czech central bank has increased its rates at each of its past three meetings to fight inflation which has exceeded its 2 percent target.
It is seen increasing its main rate further from 1.5 percent.
The currencies of Hungary and Poland, whose central banks have kept rates at record lows, have lost even more. The forint has eased about 4.5 percent and the zloty more than 3.5 percent so far this year.
But a likely pick-up in core inflation is expected to nudge the two banks toward tightening their policies next year.
The National Bank of Hungary is expected to allow the 3-month interbank rate
"Big current account surpluses could (also) support the forint, just like the arrival of delayed EU fund inflows," said Takarekbank analyst Andras Horvath.
Poland's fiscal discipline earned it a credit rating upgrade from Standard & Poor's earlier this month, but the government may loosen the reins in 2019 before elections to the European and national parliaments, analysts said.
A rise in inflation pressure could make rate setters at the National Bank of Poland (NBP) less dovish, they said.
"In 2019, we expect a mild PLN (zloty) appreciation as market tensions cool off and the NBP gets closer to a rate hike. However, slowing (economic) growth limits EUR/PLN downside," Nordea analysts said in a note dated Oct. 25.
Romania's central bank has also tightened its policy this year, while the Serbian central bank has not cut interest rates further from the region's highest level at 3 percent.
The median forecasts in the poll still see the leu (EURRON=) and the dinar (EURRSD=) weakening by about 1 percent versus the euro in the coming year, to 4.715 and 119.5, respectively.
Deteriorating Romanian economic fundamentals and weak foreign direct capital inflows are negative to the leu even though the central bank is likely to provide support to the currency, said Jakub Kratky, analyst of Generali (MI:GASI) Investments.
A likely tightening in the ECB's policies could weigh on the dinar, he said.
"Also, we noticed a bit higher volatility over past weeks and the NBS (central bank) also occasionally shifted from predominant buying of euros to selling, to support the dinar," Kratky added.