UPDATE 2-Czech cbanker sees steady rates over longer period

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By Marek Petrus

Czech monetary policy is likely to hold steady over a longer period of time, but it is impossible to rule out transitory hikes or cuts in interest rates, central bank (CNB) Vice-Governor Miroslav Singer said on Friday.

Speaking to journalists, Singer said the CNB was coping with an "unusual" degree of uncertainty over the economic outlook, including inflation, exchange rate and fiscal policy, making it exceptionally difficult to foresee future interest rate moves.

"The problem is darned big uncertainty over the entire economic developments," Singer, one of the more dovish members of the seven-strong CNB policy board, said on the sidelines of a conference on European integration.

"The reflection of this uncertainty is the statement about a long period of stable rates ... I can imagine that we move with rates in one direction and later move them back, that is at least my vision of how monetary policy may look like."

His comments reinforced the market's view that interest rates will be stable until at least the summer before a possible quarter point rate hike following 75 basis points worth of tightening between October 2005 and September 2006.

Short-dated market rates -- most sensitive to shifts in expectations for monetary policy -- shed 2-3 basis points on Singer's comments.

"The market views Singer's 'uncertainty' as rather a further confirmation that a hike will be delayed," said Dalimil Vyskovsky, debt trader at Komercni Banka in Prague.

"But the market's own uncertainty is being heightened by inconsistent comments by individual central bankers and the central bank's opaque (inflation) forecast," he added.

Last month, the CNB voted unanimously to hold rates at 2.50 percent, the lowest level in the European Union, but minutes from the meeting showed some board members did not rule out a future rate cut, citing numerous inflation risks on both sides.

DIFFERENTIALS, CPI TARGET

Singer said the discount between lower Czech interest rates and those of the euro zone and other countries appeared to be helping weaken the crown currency, which has dropped from all-time highs seen in late December and early January.

The key Czech rate is now a record 100 basis points below the ECB's equivalent, which markets expect to rise to 3.75 percent in March .

Low Czech rates mean investors prefer to sell the low-yielding crown to fund investment in higher-yielding, mostly emerging markets assets, with the goal of capturing the interest rate spread.

Singer also opposed cutting the CNB's inflation target from current 3 percent until after a clear euro zone entry strategy has been set. Some of his fellow CNB policymakers have suggested such move need not be linked to preparations for euro adoption.

"The current target does not seem to me to be fundamentally wrong," he said.

Czechs have no formal target date for adoption of the euro after dropping the previous 2010 date last year. But Singer said the government and the CNB are expected to discuss a new common strategy in the coming months. ((Editing by Gerrard Raven; 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: ECONOMY CZECH/SINGER

[PRAGUE/Reuters/Finance.cz]