UPDATE 2-Czech c.banker Singer says would consider rate cut

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By Marek Petrus

Czech central bank Vice-Governor Miroslav Singer suggested that interest rates could be cut to offset the strength of the crown, a view contrary to market expectations that a rise will be the next move.

Singer was quoted on Wednesday by the business daily Hospodarske Noviny as saying he would "seriously consider" cutting interest rates if the crown stayed firm. It has rallied 6 percent to record highs versus the euro over the last year.

The central bank (CNB) raised its key rate 75 basis points between October 2005 and September 2006 to 2.5 percent, the lowest in the European Union and 1 percentage point below the euro zone equivalent.

Markets have fully discounted a quarter percentage point rate rise by mid-year. Following Singer's comments the crown fell to two-week lows to the euro , and money market rates and debt yields also dropped as the probability of such a move declined.

Singer said he could ignore the crown's rise if it looked like it was going to be short-lived and followed by a weakening.

"But as there is no such certainty, I have no choice but to assume that such a strong crown will stay with us in the future," Singer told the paper.

"In this case, it is currently not about a near-term interest rate increase, and it is likely that I will seriously consider whether or not it would be appropriate to lower interest rates."

The paper quoted Singer, a member of the central bank's seven-member policy board, as saying there were no signals suggesting a possible rate cut would threaten the economy.

PRICING OUT RATE HIKES

At 1.7 percent in December, the annual inflation rate was well below the central bank's goal, which is 3 percent with a tolerance of 1 percentage point either side.

The crown slid as low as 27.740 per euro in early trade and traded at 27.715 by 0815 GMT, extending its drop from a record high of 27.410 reached in late December to about 1 percent.

The tightening effect that the crown's rise is likely to have on the economy has so far led investors to expect the CNB to delay a rise in interest rates, rather than to cut them.

The CNB has been expected to cut its inflation forecast but hold interest rates steady at a Jan. 25 meeting, while keeping alive expectations of another rise later this year, to track a forecast euro zone rate increase.

"Singer's comments are likely to lead to further pricing out of rate hikes," said Silja Sepping, economist at Lehman Brothers. "Although the path of regulated prices poses some uncertainty, we believe that inflation is likely to stay at around 2 percent in the first half of the year, so there is no need for further hikes," she added. ((Editing by David Stamp; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com;

Tel: +420 224 190 477))

Keywords: CZECH CENTRALBANKER/

[PRAGUE/Reuters/Finance.cz]