PRAGUE The Czech central bank is likely the first in line in central Europe to start lifting interest rates and looks to be prepping the market for a move this year, faster than expected, the head of Erste Group Bank's Czech asset management company said on Tuesday.
Most central banks in the region have remained somewhat dovish, despite a pickup in growth, as inflation moderates.
The Czech National Bank took its first tightening step in April when it abandoned a cap on crown strength after 3-1/2 years and attention is on when it will follow with its first rate hike in almost a decade.
The latest Reuters poll showed most expected a hike in the first or second quarter of 2018.
Martin Rezac, head of the Czech branch of Erste Asset Management, which manages 190 billion crowns ($8.07 billion), said central bankers look to be getting markets ready sooner.
He also said Poland may be the next in line, at a later time, while Hungary, where rate hikes are seen off the table until 2019, faced the risk of falling "behind the curve" if they stay low too long and demand pressures drive up inflation.
Rezac said his funds remained overweight on Polish and Hungarian assets. They are underweight on Czech bonds and are not yet ready to begin going bigger with short-term yields still low or near zero.
The signs, though, of Czech monetary tightening are growing especially as the crown is slow to rise since being set free.
"(Central bankers) seem to be preparing the market mentally that something is going to happen in the third or fourth quarter 2017," Rezac said in an interview at the Reuters Central & Eastern Europe Investment Summit.
"Especially if the crown stays at current levels then I can easily imagine the Czech National Bank will be more than happy to increase interest rates."
"I think this would be more of a test. They would then wait and see what the crown will do."
CNB board member Vojtech Benda told the summit on Monday that the bank was in no rush to raise rates. He said the third quarter would be key to seeing whether a hike may need to come at the end of the year or in 2018.
Other Czech central bankers have raised the chance of a hike this year. Czech markets price in a hike within a year while Polish markets are pricing a hike in 18 months.
Rezac said central Europe's economic growth should outpace the west, boding well for stock markets, including banks, which will likely see a faster impact from the normalization of rates.
"The momentum in earnings growth, especially in Poland and Hungary, is significantly better compared to the rest of Europe," he said. "We speak about double-digit figures percentage-wise so, from that point of view, banks in this region will profit from this development faster than in Europe."
(Editing by Alison Williams)