* Central bank surprises with 25 bps rate cut
* Rates at record low, on par with ECB
* Crown weakens, money market rates fall
* For HIGHLIGHTS, click on []
(Add c.bank comment, updates prices)
By Jana Mlcochova
PRAGUE, Dec 16 (Reuters) - The Czech central bank surprised
markets on Wednesday by cutting interest rates to a new record
low, showing concern of protracted economic weakness despite
sings of slightly higher price pressures.
Policymakers trimmed the main two-week repo rate
<CZCBIR=ECI> <CZRP=>, used to skim off excess liquidity, to 1.0
percent, bringing it in line with the euro zone's main rate and
far below rates in other non-euro central European countries.
The crown <EURCZK=> weakened as much as 1 percent to 26.355
per euro following the decision but later firmed back to around
26.245, above Tuesday's closing levels. Money market rates
dropped.
Analysts had said the decision would be a close call and the
market had priced in a 25-50 percent chance of a cut, but most
banks had forecast no change due to losses of 0.6 percent for
the crown in the last month and a pick-up in inflation.
"Today's decision is a bit surprising when seen in the
context of recently released data and growing risk aversion in
financial markets," said Radomir Jac, chief analyst with
Generali PPF Asset Management.
"Risk aversion and the possibility of a weaker crown were
the key reasons for keeping interest rates on hold in November."
Analysts said rising fiscal after parliament approved extra
spending for next year and uncertainty over 2011 budget ahead of
election due in May also suggested caution.
The bank did note release names but confirmed market belief
that the vote was narrow: 4 to 3 in favour of the move.
Vice-Governor Miroslav Singer said the bank was aware of
somewhat higher inflation and currency risks for inflation, but
said the cut followed the bank's quarterly inflation forecast
revealed in November - although the bank did not cut back then.
"That is why the board decided, in line with the forecast,
to put the rates in a direction that the forecast indicates," he
said.
The forecast assumed a rate cut and saw inflation would be
below the bank's 2 percent target at the end of 2010 if various
one-off effects such as tax hikes are ignored.
Most economists said the move was probably the last cut in
the crisis and months of stability would follow, although Singer
refused to put a firm floor under the rates.
The bank also cut the Lombard rate, used for overnight
lending to banks, by 25 basis points to 2.0 percent. But it left
the discount rate paid to banks for overnight deposits unchanged
at 0.25 percent, breaking the custom of moving all rates in
sync.
Money market rates <CZKF=> fell, with one week interbank
rates <CZKSWD=> down to 0.95/1.40 at 1501 GMT from 1.05/1.35
before the decision. Forward Rate Agreements <CZK3X6F=>,
contracts betting on future changes in interest rates, eased to
1.48/1.54 from 1.62/1.67, according to Reuters data.
CROWN IN SPOTLIGHT
Dealers said the cut boosted the likelihood that the crown
would be used as a funding currency of regional carry trades,
which use currencies with low interest rates to invest in higher
yielding ones, such as the zloty or the forint.
Analysts believe the highly open Czech economy has passed
the worst in the crisis but they do not expect strong upturn.
The economy shrank at 4.1 percent in the third quarter, less
than the bank forecast for a 4.9 percent contraction. It grew
0.8 percent on quarterly basis.
But shrinking household consumption and worsening labour
market threatening to suppress demand supported more easing.
(Additional reporting by Robert Mueller; Editing by Patrick
Graham and Victoria Main)
