A top Czech rate setter warned of higher interest rates and Hungary's prime minister sought new means to defend the forint on Wednesday as emerging European policymakers faced up to steep falls in their currencies.
Investors stepped up a long selloff in the Hungarian, Czech and Polish currencies this week, exacerbating a slide that has caused some small Polish firms to fail and squeezed millions across the region who have borrowed in euros and Swiss francs.
On Tuesday, Poland's government warned it might sell European Union development funds through the currency market — creating demand for zlotys — to stop a fall in the currency which has lost a third against the euro since July.
On Wednesday, Czech central bank Vice-Governor Miroslav Singer said his fellow policymakers may end a months-long easing cycle to interest rates and instead raise the cost of borrowing in response to the falling crown, which has lost 6 percent since the bank's last meeting and 9 percent this year.
"Cutting rates is not at all a matter for a debate with the current levels of the exchange rate," Singer told daily E15. "The question is (whether) to raise and by how much," he said.
The Czech crown surged 0.6 percent to 29.32 per euro after plunging to a more than three-year low on Wednesday.
Polish and Hungarian rate setters have also indicated currency weakness could limit interest rate cuts despite output slamming into reverse due to a collapse in euro zone demand for goods produced in the export-heavy region.
But the timing of the comment and that it came from the Czechs, who cut rates by 50 basis points to 1.75 percent on Feb. 5 to an all-time low, indicated momentum towards a downshift.
"Policymakers in several countries in Emerging Europe have indicated that the pace of rate cuts may slow over the coming months," wrote Capital Economics economist Neil Shearing.
Some analysts have suggested the region's governments and central banks may take a coordinated approach to the currency weakness, but so far there have been no official proposals.
Underlying the selloff is a collapse in exports and industry and mounting job losses. Many economists have abandoned the idea that any country will escape recession.
A growing number say even Poland, the largest ex-communist EU member and protected somewhat by less reliance on exports and a large domestic market, may contract.
UNCONVENTIONAL DEFENCE
In Hungary, Prime Minister Ferenc Gyurcsany asked the central bank governor and the finance minister to find a way to staunch bleeding on the forint, which has lost 14 percent this year and hit a record low of 310 per euro late on Tuesday.
"Yesterday I talked to both the central bank governor and the finance minister, asking them to explore whether there are such unconventional methods of intervention that may help protect the Hungarian forint," Gyurcsany said.
The fall poses a sticky problem for Hungary, which had to grab a $25 billion lifeline from the International Monetary Fund last October. Sixty percent of its mortgages — about 2.374 trillion forints ($9.77 billion) — are in foreign currencies.
Those borrowers and other citizens and firms with foreign currency loans are now facing a spike in monthly payments, putting pressure on the banking sector and the economy.
A big concern for Poland is that many smaller firms took out currency option contracts last year to protect themselves from what was then expected to be zloty strengthening.
But the unit has tanked and they must buy euros to cover losses, worsening the slide and causing some firms to fail.
Bulgarian Prime Minister Sergei Stanishev said his country would stay with its currency board pegging the lev to the euro.
Central bank Governor Ivan Iskrov added: "We don't plan any experiments …All countries in the region which have floating currencies have gone mad trying to tame the currencies."
A Polish ruling party official said on Wednesday that Poland a few days ago had started official talks with the European Central Bank on joining the pre-euro Exchange Rate Mechanism (ERM-2).
But Polish central bank Governor Slawomir Skrzypek poured cold water on the government's plan to adopt the euro in 2012, saying the market was too unstable.
"There are no economic reasons to enter the ERM-2 mechanism this year," Skrzypek told daily Rzeczpospolita. "We are not ready. The zloty exchange rate is not stable enough, therefore the ERM-2 mechanism cannot be introduced."
He also said Poland would fight to keep growth above 1 percent this year. The government sees growth of 1.7 percent.
