After a shaky start to 2007, Central Europe's fast- paced economies and often capricious financial markets could be in for a turbulent period in the coming months.
Indeed, signs of slowing growth, inflation fears and questions over the global economic outlook are likely to pose a dilemma for the central banks from the region's four leading nations - Slovakia, Hungary, Poland and the Czech Republic - which begin their first meetings for 2007 this week.
But while markets are expecting the region's monetary authorities to hold fire on interest rates until they have assembled a more detailed economic picture, the slump in key Central and Eastern European (CEE) currencies since the start of the year has already helped to fuel worries about the CEE's economic outlook.
"The new year has started more volatile than is normally the case," said Michael Dybula, economist with the French investment house BNP Paribas in Warsaw. "In general, we expect the year to be overshadowed by the economic growth outlook, especially in the US," Dybula said.
Moreover, widening current account deficits across Central Europe, ongoing political tensions in the region combined with concerns that a cooling US economy could hit the 13-member eurozone and consequently undercut the CEE's recent run of robust economic growth have helped to give a jolt to sentiment about New Europe's economy.
Underscoring the political concerns facing the region has been the long battle in Prague to forge a new Czech government and Poland's move to install a new central bank chief with close links to the nation's prime minister and president.
The Polish zloty chalked up its biggest daily loss since May when Warsaw announced plans this month for Slawomir Skrzypek to take over the running of the country's national bank. "Everything is drifting to the negative in 2007, after drifting to the positive in 2006," said Lars Christensen, senior analyst with Copenhagen-based Danske Bank.
After racing ahead last year with an average economic growth rate of about 6 per cent, Slovakia, Hungary, Poland and the Czech Republic, which were among the 10 largely Central European states that joined the European Union in May 2004, are expected to chalk up an average expansion rate of closer to 4 per cent in 2007.
Highlighting worries about Central Europe's economic outlook, Hungarian central bank chief Zsigmond Jarai warned Friday that headline inflation in the nation could surge above 10 per cent in the coming months.
But apart from renewed weakness in Central European currencies, analysts believe the somewhat brittle global outlook could in turn spill over into the region's fickle share and bond markets raising the risk of a serious round of volatility in CEE financial assets in the next few months.
Also adding to the jitters about CEE currencies is the continuing speculation about the US Federal Reserve's next moves on interest rates. Central European currencies gained ground in the run-up to the end of 2006 partly on the back of optimism about the eurozone's economic outlook for 2007.
Consequently, some economists see the recent pressure on the CEE's currencies as signalling a retreat from previous somewhat upbeat scenarios about the economy built around the euro.
With more than 70 per cent of exports from many Central European states going to the eurozone, the new EU member states are directly linked to the eurozone's economic fortunes.
What is more, economists also say that a sustained period of volatility could also help to set the stage for a repeat this year of the shakeout that emerged across Central European financial markets during the first half of last year.
A less buoyant set of growth rates for Central Europe could also impact on budget deficits in the region and consequently raise fresh doubts about when the nation's leading economies will be ready to begin their final push to joining the euro.
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