(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,
following warnings it could ease due to the strong crown, which
is threatening to drive down inflation and also growth.
The cut, which brought the key repo rate to 3.50 percent,
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 crown weakened on the news to a new seven week low of
24.219 against the euro <EURCZK=>, versus 23.98 before the rates
decision, before recovering to 24.17 at 1512 GMT.
The bank cut its prognosis for economic growth to 4.1
percent this year and 3.6 percent next, versus 4.7 and 4.0
previously.
Central bank Governor Zdenek Tuma said the crown was not the
only factor behind slower growth, and he could not exclude
another cut this year.
"It was confirmed that the Czech economy is in declining
phase and after all the forecast shows that we now expect bigger
dampening than the last time, which is quite clearly an
anti-inflationary development," Tuma said.
The bank said the board voted 6-0 for the cut.
The bank's forecasts also indicated a slight rise in the
inflation outlook to 2.5 percent at the end of next year. It had
earlier seen it falling to 2.2 percent in the third quarter.
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 at 4.25 percent on Thursday, and well
below those of other central European countries.
"At levels (on the strong side of) 24.00, the crown
represents a significant risk, which could trigger a
hard-landing of the Czech economy with falling inflation and
rising unemployment," said analysts at Komercni Banka, who had
predicted the cut.
"Such risks should be avoided."
Komercni said a weaker crown would likely keep rates on
hold for the foreseeable future but others, such as JP Morgan's
Miroslav Plojhar, said the move was just the first in a series
as the growth outlook in the whole region darkens.
CROWN THREAT
A strong currency pushes down import prices and hurts
exporters, squashing inflation and growth forecasts.
"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.
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.
Tuma said a return of the crown to an appreciation trend
would be a significant anti-inflationary risk but did not add to
his sharp comments on crown strength last month.
"In my opinion, to a large extent the lowering of rates has
already been reflected in the market so I do not believe that
the lowering we decided on today should influence the exchange
rate in any fundamental way in the coming weeks," he said.
(For more analysts comments, click on []
For HIGHLIGHTS from news conference, click on []
For c.bank forecasts click on [])
(Reporting by Jan Lopatka; Editing by Gerrard Raven)
