(Adds analysts, background, updates prices)
By Jan Lopatka
PRAGUE, Aug 7 (Reuters) - The Czech central bank
surprisingly cut interest rates by 25 basis points on Thursday,
making good on warnings it could ease due to the strong crown,
which is threatening to drive down inflation and also growth.
The cut brought the key repo rate to 3.50 percent and was
the bank's first since April 2005. It followed eight hikes that
accompanied several years of fast economic growth in the central
European state and a pick up in prices.
Analysts polled by Reuters had expected rates to stay on
hold [], although traders said the money market had
priced in the chance of a reduction.
"The central bank is clearly concerned about the possibility
of crown appreciation leading to inflation undershooting (its 3
percent target) next year and the outlook for growth," said
Silja Sepping, an analyst at Lehman Brothers.
"We had expected them to wait for the peak in inflation and
more evidence from the real economy before easing and to monitor
FX developments. But after the more proactive decision today,
the bank will probably ease again before the end of the year."
The crown immediately weakened on the news to a six-week low
of 24.125 against the euro <EURCZK=>, versus 23.98 before the
move. It later recovered to 24.05.
The cut put the Czechs at the vanguard of a potential return
to policy easing in central and Eastern Europe, a region where
most countries have been battling inflation caused by high
commodity prices and economic growth.
It also pulled the Czech cost of borrowing further below the
euro zone base rate, left by rate setters at 4.25 percent on
Thursday, and well below those of regional peers Poland, Hungary
and Romania, which range from 6.0 to 10.25 percent.
The bank gave no details on the decision but called a news
conference for 1330 GMT.
CROWN THEREATENS OUTPUT
The crown's surge to record highs is the sole reason for the
rate cut. A strong currency pushes down import prices and hurts
exporters, squashing inflation and growth forecasts.
Exporters have complained of vanishing markets due to the
strong currency and a slowdown in western Europe.
Data showed new manufacturing orders dipped by 1.9 percent
in May, and foreign orders fell by 6 percent. The Purchasing
Managers' Index fell to a more than five-year low in July.
"We are happy (for the cut). We were hoping that this would
happen and our exporters were calling for this move," said
Oldrich Koerner, deputy economic director at the Union of
Industry and Transportation.
The central bank will release new inflation and growth
forecasts later on Thursday. It already sees growth slowing to
4.0 percent next year from 5.3 percent in the first quarter.
Backed by the strong economy as well as capital inflows
seeking a safe haven amid the world financial turmoil, the crown
firmed as much as 18.7 percent year-on-year against the euro
<EURCZK=> to hit a record of 22.925 last month.
Several central bankers knocked it back with warnings they
could cut rates on Thursday to prevent the unit from pushing
inflation below target. The crown has since dipped 5 percent.
Analysts had however expected the bank to hold steady for
now because of uncertainty how fast inflation, running at annual
6.7 percent in June and expected to peak in July, will drop in
the coming 12-18 months.
(For more analysts comments, click on [])
(Reporting by Jan Lopatka; Editing by Ron Askew)
