By Marcin Goettig
WARSAW (Reuters) - Economic growth should pick up in Poland and the Czech Republic in the next two years, driven by exports and domestic demand, but "controversial" government policies will leave Hungary lagging behind, the OECD said on Tuesday.
The Paris-based Organisation for Economic Cooperation and Development also cautioned in its twice-yearly report on eastern Europe that the crisis in Ukraine could hurt regional trade, potentially affecting the pace of economic growth.
The OECD raised its growth forecasts for Poland, eastern Europe's biggest economy, to 3.0 in 2014 and 3.4 percent in 2015. In its previous report last November, it said Polish growth would reach 2.7 percent in 2014 and 3.3 percent in 2014.
"Real GDP growth is projected to gain momentum, driven by buoyant exports and a gradual strengthening in domestic demand," the report said. "Headline inflation is likely to remain moderate in the coming few quarters."
The OECD slightly raised its economic growth forecasts for the Czech Republic, to 1.2 percent in 2014 and 2.4 percent in 2015, saying that an export-led recovery was likely to reverse a two-year decline in private investment.
"The deep integration of (Czech) manufacturing into the German supply chain means that the recovery remains vulnerable to disinflationary or financial market shocks originating in Germany or its main trading partners," the OECD said.
"Events in Ukraine also constitute a negative risk."
The OECD, which groups the world's most developed economies, said it saw a risk that the Russia-Ukraine conflict could reduce the trade flows of Poland and Hungary, weakening growth in both countries.
Steep declines in the Russian rouble and Ukrainian hryvnia have already hurt Poland's trade with its eastern neighbours.
Poland's Deputy Prime Minister Janusz Piechocinski said in April that Polish exports to Russia and Ukraine in the first quarter fell by an annual 8 and 19 percent respectively.
"CONTROVERSIAL POLICIES"
The OECD left its 2014 economic growth forecast for Hungary, the region's most indebted economy, unchanged at 2.0 percent. It slightly trimmed the forecast for 2015 to 1.6 percent.
The moderate recovery in Hungary will be driven by robust export growth and a gradual acceleration of private investment, it said, adding: "The latter will nonetheless continue to be hampered by an uncertain business environment related to controversial domestic policies and tight credit conditions."
The central bank's policy of cutting interest rates has only partly alleviated the tightness of credit, the report said.
Hungary's central bank cut its benchmark policy rate to a new record low of 2.5 percent in April. This means that rates in Poland and Hungary now stand at the same level. By comparison, in mid-2012 Hungary had an interest rate of 7.0 percent and Poland's stood at 4.75 percent.
Hungary will have to balance further rate cuts against "the more acute risk of an abrupt depreciation of the forint", the OECD said.
"Despite a solid current account surplus, Hungary remains vulnerable to turbulence in global financial markets," it added.
"Further forint depreciation would make servicing and rolling over public and private debts harder as a significant share is denominated in foreign currency or foreign-held."
The forint traded at 307.7 to the euro by 0736 GMT on Tuesday. The currency is now about 5 percent off its all-time low of 324.20, a level it hit at the beginning of 2012.
(Editing by Gareth Jones)