Czech Republic, Slovakia, Hungary face higher interest rates

Central banks in three of the European Union's newest members may raise interest rates this year to hold down inflation, surveys of economists show. The Czech Republic, Slovakia and Hungary are likely to increase rates, economists said, while Poland's central bank, which has kept its benchmark rate at 4% since February, may leave it there for the rest of the year. Poland will announce its monthly rate decision today in Warsaw. Central banks are under pressure to control inflation in order to meet conditions for adopting the euro. Polish, Slovak, Hungarian and Czech inflation rates currently average 2.9%, compared with 2.5% in the euro region, where the European Central Bank has raised its benchmark rate three times in seven months. “Sooner or later, the tightening cycle will be initiated'' across central and eastern Europe, said Lars Christensen, chief economist at Danske Bank in Copenhagen. “Inflation is accelerating everywhere, but for different reasons. In the Czech Republic, Slovakia and Poland it is driven by domestic demand, in Hungary by currency weakness.'' Poland's central bank will leave the benchmark rate unchanged today, according to all 17 economists surveyed by Bloomberg. Inflation will accelerate to about 1.5% in December, the central bank said on May 31, from 0.9% in May. The inflation rate, the EU's lowest, remains below the central bank's target.

Inflation Outlook: “We will be looking into the statement after the meeting to see whether the balance of risk for future inflation has changed,'' said Maciej Reluga, chief economist at Bank Zachodni WBK in Warsaw. Polish rates will remain unchanged through the year, according to the median estimate of 10 economists. Three forecast a quarter-point increase. The Czech Republic's two-week repurchase rate will rise to 2.25% by the end of the year from 2% now, according to seven of 11 economists surveyed by Bloomberg. The other four predict two increases to 2.5%. Czech lending rates, the lowest in the European Union, compare with the ECB's 2.75%. For now, the central bank's seven-member board will keep interest rates unchanged at its monthly meeting tomorrow, according to all 12 economists in a Bloomberg survey. As central banks around the world raise rates, led by the U.S. Federal Reserve and the ECB, Czech policy makers will probably increase borrowing costs later in the year, economists said.

Slovakia, Hungary: The Slovak central bank may raise the benchmark two-week repurchase rate to 4.5% by the end of the year from 4% now, five of nine economists surveyed by Bloomberg said. One predicted the rate would be unchanged, while two forecast an increase to 4.75% and one estimated 4.25%. The central bank kept the rate unchanged yesterday after raising it a half-point the previous month. The bank has increased its key rate by a percentage point this year to fend off inflation stemming from rising wages and higher energy bills. Hungary's central bank will probably raise its benchmark borrowing rate to 7% from 6.25% in one or two steps as the forint depreciates, according to the median estimate of six economists surveyed by Bloomberg. The forint has fallen 6.4% against the euro this month, partly on concern that government plans to raise taxes and increase regulated prices will stoke inflation. The central bank on June 19 raised the rate by a quarter-point to 6.25%, the first increase in two-and-a-half years.