(Adds bonds, updates prices, quote)
* Poland seen cutting rates as slowdown deepens
* Other currencies mixed, weak economies, looser rates weigh
* Stocks mixed, bonds stay in demand
By Jason Hovet
PRAGUE, Oct 3 (Reuters) - The zloty led losses in central European currencies on Wednesday, while Polish bonds were a tad stronger ahead of a central bank decision, which is expected to make the third cut in interest rates in the region in a week.
Analysts predict the Polish central bank will follow its Czech and Hungarian peers with a rate reduction to 4.5 percent on Wednesday, reversing a rise in May in order to counter a slowdown in the region's largest economy.
Weakening growth and rate cuts to go with it have taken the steam out of a rally that has made the zloty and Hungarian forint some of the world's top performing currencies this year.
By 0909 GMT, the zloty
dropped 0.3 percent to bid at 4.121 to the euro. Bond yields were a touch lower, with two-year paper quoted at 3.98 percent, down 1 basis point.
The region's currencies have slipped by between 0.5 and 3 percent since mid-September, falling back after a rally in early September on the announcement of fresh stimulus measures from U.S. and euro zone central banks.
Dealers expect more weakening in the final quarter of 2012.
SEB bank said it was holding a short-term negative zloty position going into the rate decision.
"I think there's still room for a further fall in yields at the shorter end of the curve," a dealer said. "Today's expected move is likely to be the beginning of the full (easing) cycle."
Global growth concerns have rattled markets, while in Central Europe the Czech Republic and Hungary have slid into recession and Poland's growth is slowing quickly.
The head of Poland's central bank, Marek Belka, said last week the bank would discuss a rate cut and that any move would not be a one-off.
Dealers and analysts said a rate cut is already priced in, which should limit losses for the currency. A decision to hold rates could boost the zloty, and in the event of a cut, the market will look for clues to the timing of further cuts.
"Should the NBP sound particularly dovish and thus signal that another rate step would follow in the forthcoming period, we expect PLN to come under pressure, with EUR-PLN heading back within the reach of the 4.14/15 resistance area," Commerzbank analyst Thu Lan Nguyen said.
Central Europe's rally this year, with to 8-10 percent gains for the zloty and forint, has been fuelled by investors' hunt for relatively safe yields in countries beyond the crisis-ridden euro zone.
On Wednesday, the Czech crown and forint edged up by 0.1-0.2 percent, while the Romanian leu
dipped 0.1 percent.
Stock markets were mixed, with Budapest
up 0.6 percent and Bucharest
down 0.8 percent.
The region's bonds have been holding up, as evidenced this week by strong demand for 1.75 billion euros of Polish 12-year bonds and the sale of Czech 10-year euro-denominated paper at record low yields
A domestic Czech auction was expected to draw good demand on Wednesday, and yields moved lower before the midday results.
Hungary, central Europe's most indebted country, is waiting to go to foreign debt markets while it is in loan talks with the International Monetary Fund and European Union.
Budapest has so far dragged its feet on getting a financing deal, which has weighed on markets. The IMF has questioned the government's growth outlook, saying it is too rosy.
Newspaper Magyar Nemzet reported on Wednesday that ministers planned to raise their 2013 deficit target to 2.8 percent of economic output from 2.2 percent in an effort to avoid drastic budget adjustments.
Currency Latest Previous Local Local close currency currency change change today in 2012 Czech crown
24.962 25.011 +0.2% +2.34%
4.121 4.107 -0.34% +8.34%
285.91 286.16 +0.09% +10.03%
7.453 7.444 -0.12% +0.84%
4.528 4.525 -0.07% -4.57%
Serbian dinar 115.16 115.56 +0.35% -7.13% Yield Spreads Czech treasury bonds 2-yr T-bond CZ2YT=RR -7 basis points to 40bps over bmk* 7-yr T-bond CZ6YT=RR -3 basis points to +89bps over bmk* 10-yr T-bond CZ10YT=RR -1 basis points to +92bps over bmk* Polish treasury bonds 2-yr T-bond PL2YT=RR 0 basis points to +394bps over bmk* 5-yr T-bond PL5YT=RR +1 basis points to +363bps over bmk* 10-yr T-bond PL10YT=RR -2 basis points to +321bps over bmk* Hungarian treasury bonds 3-yr T-bond HU3YT=RR +6 basis points to +659bps over bmk* 5-yr T-bond HU5YT=RR +3 basis points to +629bps over bmk*
10-yr T-bond HU10YT=RR 0 basis points to +584bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1111 CET.
Currency percent change calculated from the daily domestic
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(Reporting by Reuters bureaus, writing by Jason Hovet; editing by Jane Baird)
Keywords: MARKETS EASTEUROPE/