(Corrects easing to tightening in first paragraph)
* Market pricing may be too ambitious on rates outlook
* Hungary, Czech rates to follow in first half 2011
* Divergence in policy favours zloty vs CEE peers
By Jason Hovet
PRAGUE, Nov 19 (Reuters) - Poland will be the first country in the European Union's eastern wing to start to reverse two years of record loose monetary policy, but investors have begun to think twice about the pace of tightening currently expected.
Above-forecast growth and a pickup in consumer activity will also lead to tightening in Hungary and the Czech Republic by the middle of next year, analysts say, although the pace of rate hikes will not be quick.
Poland is the region's only country with much inflationary pressure and there had been signs of a swing among policymakers needed to force through at least a small 25 basis point rise after August's 6-4 vote against a larger 50 bps move.
But two of the central bank's perceived policy hawks have since signalled more doubts, and forward rates -- showing where investors think official borrowing costs will be in future -- have reined in bets of immediate tightening. [ID:nLDE6AF0SR]
With December traditionally a shortened working month in which the Polish central bank does not change policy and the euro zone economy expected to slow in the new year, the picture by January could be less bullish.
Analysts still expect some tightening. The question is whether it will be as much as the at least 100 basis points factored in by forward rate markets in the next year.
"The pace that is currently expected by the markets is too much," Warsaw-based BNP Paribas economist Michal Dybula said.
"(Markets) are going to be disappointed because of external factors. The ECB is probably unlikely to deliver anything real soon (on euro rates); on the local side, the zloty will stay strong and there will be no inflationary pressure on the core readings."
The contradictory MPC comments, however, have left some still in doubt over next Wednesday's decision. A Reuters poll on Friday showed 10 of 18 analysts forecast no change in the bank's main rate -- now at a record low of 3.5 percent -- while the rest expected a 25 basis point rate rise. [ID:nLDE6AI0KV]
REGIONAL ADVANTAGE
Poland's stronger growth outlook means the flood of cheap money flowing from the U.S. Federal Reserve's quantitative easing has tended to favour the zloty over its peers. A rise in local rates, after 16 months unchanged, would only reinforce that, particularly denting appetite for Czech crowns.
On the flip side, any pull back in the scale of tightening
expected could harm the Polish currency
Most analysts have forecast Polish rates to rise 50-100
basis points by the end of 2011. The 6x9 forward rate agreement
(FRA)
RBC strategist Nigel Rendell said pricing in the markets was steep. "We would probably be receivers in Poland just because so much is priced into the curve already," he said.
RBC took profit last week on a long zloty versus the Czech crown trade after a selloff connected to U.S. dollar firming, although it said the zloty would continue to firm against the crown due to the divergence in monetary policy outlooks.
FLOWS, DIVERGENCE
The Czech central bank's new forecasts this month put the prospects of rate tightening from a region-low 0.75 percent off until later in the second half of 2011 year due to the expected economic slowdown caused by government budget cuts next year.
Analysts expect the bank to move as early as mid-2011 -- faster than forecasts imply due to firmer manufacturing and domestic demand. Markets are pricing a rise in six months time.
In Hungary, where rates are at a record low 5.25 percent, the central bank's new forecasts this month will factor in the government's budget-saving tax and pension changes, which the bank has said signalled a rise in domestic inflation.
Nomura economist Peter Attard Montalto said that in Hungary, a country trying to climb out of a steep 2009 contraction and tackle one of the highest debt loads in the region, a hike could make for a better recovery by helping households with foreign currency debt.
As the government tries to rebuild market confidence after shocking investors with a string of measures including "crisis taxes" on banks and other industries and rolling back pension reforms, higher rates could help strengthen the forint currency.
The forint is 16 percent weaker to the euro since a record high in mid-2008 and 30 percent down against the Swiss franc, which has hammered mortgage holders since a majority of housing loans are taken out in the Swiss currency.
"They can normalise policy even under a weak growth outlook pretty soon in the first quarter next year," Montalto said.
(Editing by Patrick Graham)