East European Currencies: Czech Koruna Drops on Rate Outlook

By Yon Pulkrabek

Sept. 22 (Bloomberg) -- The Czech koruna declined against the euro as investors bet the central bank will cut its benchmark interest rate for a second straight month this week. The Hungarian forint rose for a third day.

The Czech central bank may lower the main two-week repurchase rate by another quarter point at its meeting on Sept. 25, according to three of 16 economist surveyed by Bloomberg News with the rest expecting no change. The bank unexpectedly lowered rates at its last meeting on Aug. 7 after a surge in the koruna threatened to slow the economy.

``We think they are going to cut'' as ``the currency is very strong,'' said Nicholas Kennedy, an emerging markets currency strategist at 4Cast Ltd. In London.

The koruna fell 0.4 percent to 24.045 against the European Union's common currency at 11:35 a.m. in Prague. The koruna has been the best performing European emerging market currency versus the euro over the last month, rising 1.5 percent.

The central bank decision to reduce the key rate on Aug. 7 was forecast by eight economists with 13 expecting no change. At the time, all six bank board members present voted for the reduction and discussed lowering rates by half a point.

``It wouldn't surprise me if the Czech koruna falls this week'' before the rate decision, said Lucy Bethell, an emerging market currency strategist in London at Royal Bank of Scotland Group Plc. ``I think the market will wonder if there will be a rate cut.'' Bethell expects the bank to reduce borrowing costs in November.

Tuma Comments

Central bank Governor Zdenek Tuma said on Aug. 7 borrowing costs may be trimmed further below the European Central Bank's 4.25 percent rate, making the koruna less attractive. The koruna has appreciated 14.4 percent versus the euro in the last 12 months, more than all 26 other emerging-market currencies tracked by Bloomberg except for the Polish zloty.

Central bank Deputy Governor Miroslav Singer said on Sept. 16 the global economic slowdown may hit exporters and drag down growth in the Czech Republic, lowering inflation below the bank's target and create room to cut interest rates.

Elsewhere, the Polish zloty gained 0.3 percent to 3.2796 versus the euro before a release that will show net core inflation rose to 3.9 percent in August, from 3.5 percent in the previous month, according to the median estimate from 12 economists surveyed by Bloomberg.

``The core inflation data will probably confirm increasing inflationary pressure from the demand side and that reinforces market expectations of one more rate hike this year,'' analysts at Bank Millennium in Warsaw wrote in a note to clients.

Three out of the 18 economists surveyed by Bloomberg expect the central bank to increase its benchmark rate to 6.25 percent at its rate-setting meeting on Sept. 25.

The forint gained 0.3 percent to 239.60 per euro as of from 240.37 at the end of last week, taking its advance in the past five days to 0.9 percent, while the Romanian leu was little changed at 3.6305. The Turkish lira gained to 1.2402 against the dollar, from 1.2458 late last week.

To contact the reporter on this story: Yon Pulkrabek in Bratislava at ypulkrabek@bloomberg.net