Cee money east eu cbanks balk at rate cuts despite downturn

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* C.banks are cautious on easing even as downturn deepens* Hungary, Romania still keen on premium to protect currencies* Czechs slash market rate outlook but hold fire* Analysts say Poles not to reverse May hike until 2013By Michael WinfreyPRAGUE, Aug 3 Three of the EU's biggest emerging eastern economies are now contracting again and the fourth is slowing sharply, so why are their central banks taking a wait-and-see approach on interest rates instead of cutting away?Falling demand from their main export market, the euro zone, and government austerity campaigns have put Hungary, Romania and the Czech Republic on the path of recession this year. In Poland, a multi-year growth spurt fuelled by investment into the Euro 2012 soccer tournament is now cramping up. Economists generally agree that all four countries could benefit from looser monetary policy. But each has its own reason for caution ranging from currency strength to rates already being very low. Facing rising prices due to external factors and tax hikes but unwilling to experiment with a wider spectrum of policy options, the central banks are sticking to convention, even as their counterparts across the emerging world slash rates."There is a mental barrier among central bankers about cutting lower than zero, using other instruments than they might normally use, or they fear that they might endanger financial stability," said Lars Christensen, chief analyst at Danske Bank."So ... most of the things the central banks are not doing, they are not doing not because it's impossible to do but because they mentally are not able to overcome those barriers."Polish policymakers actually hiked rates in May, with Governor Marek Belka citing the need to keep real interest rates positive in anticipation of a spike in inflation. A reversal now could be seen as an admission they made a mistake.

The Czechs cut their cost of borrowing to 0.5 percent in June, but analysts say they want to save the last bullet in their conventional policy arsenal until its use becomes unavoidable. And in Hungary and Romania, high levels of foreign currency loans and volatile investor sentiment make their interest rate premiums crucial to propping up the leu and forint. LESS THAN ZERO Poland became the first EU member to raise rates this year when it hiked to 4.75 percent - going against the grain of other emerging economies such as China, Brazil, South Korea, and South Africa, which are all in loosening mode. That came just as a 100 billion zloty investment drive that preceded the Euro 2012 tournament - more than double the amount earmarked for London's Olympic park - ended, removing what has been a main driver of growth over the last four years.

A Reuters poll showed on Thursday analysts expect growth to slow to 2.8 percent this year - some predicted much lower - from 4.3 percent in 2011. They also see rates on hold until 2013. But many argue the bank's focus on inflation - which has exceeded target for most of the last five years - is misplaced. Like elsewhere in the region, price growth is mainly fuelled by the cost of food and other developments outside the central bank's control. Furthermore, officials have predicted more strengthening of the zloty, which is already up 10 percent this year, a factor that would slow price growth but hit exports."In Poland policy rates have yet to react - at this stage, discussion of a rate cut makes sense," Gillian Edgeworth, chief EEMEA economist at Unicredit, wrote in a note. "More broadly, we see little reason why policymakers would welcome further FX gains from here."The Czechs have been more adventurous, surprising the markets with their June cut to 0.5 percent, a quarter point discount to euro zone rates. On Thursday, the central bank slashed its mid-term outlooks for growth and market interest rates - seen as a proxy for official rates - and said a cut to 0.25 percent would have been consistent with the forecast.

But it still held fire, with Vice-Governor Vladimir Tomsik saying most board members favoured a "wait-and-see approach". Danske Bank's Christensen said this was a case of being overly cautious."You cannot have that kind of forecast and not act," said Christensen. "It's that when they hit zero, they fear they won't have anything else to do."FX LOANS While exporters would welcome rate cuts to weaken currencies and make their goods more competitive abroad, policymakers in Hungary and Romania are loath to let that happen. Both countries are stuck with tens of billions of euros in foreign currency loans borrowed by people lured by the lower interest offered if they borrowed in Swiss francs, euros or yen - loans whose monthly payments have spiked due to losses on the forint and leu since 2008. Rate setters worry that monetary easing could spark investor flight, putting even more pressure on households and firms and deepening recession, which is a main reason they have the EU's two highest official rates of 7 percent and 5.25 percent."The central banks there are unlikely to want to see their currencies weaken too far," said William Jackson, an economist at London-based Capital Economics. Romanian Prime Minister Victor Ponta's efforts to oust his rival, suspended President Traian Basescu, have also angered the European Commission and driven the leu to near record lows, and imperilled a financial aid deal with the International Monetary Fund crucial to holding up investor confidence. And in Hungary, Prime Minister Viktor Orban's government only in July started talks with the Fund over a similar deal after months of wrangling over details. Analysts say investors who have piled into forint assets, driving the currency 12 percent higher this year, will leave quickly if there is any sign the deal will not materialise, which will keep the central bank wary."When that does come through, there's lots of scope for Hungary to cut rates," said Imran Ahmad, strategist with RBS. "But we don't see them cutting rates unless they get an IMF package."