* Czech central bank cuts rates by 25 bps to new low
* Economic drop hit bottom, CPI set to fall more
* Slight majority expected flat rates, crown steady
* Instant view: []; Highlights: []
(Adds analyst, background, updates markets)
By Jan Lopatka and Martin Dokoupil
PRAGUE, Aug 6 (Reuters) - The Czech central bank voted
unanimously to cut interest rates to a new record low on
Thursday, as a slower inflation outlook outweighed signs the
economy was beginning to rebound from a steep fall.
The decision highlighted the bank saw risks from lower
external price pressures, weakening domestic demand and the
labour market as the central European economy still suffered
from the impact of recession in key export markets.
The bank cut the main two-week repo rate <CZCBIR=ECI>
<CZRP=> by 25 basis points to 1.25 percent, a mild surprise for
a market that had been leaning towards no change given signs of
a slight recovery in foreign demand.
The Czech economy slid a record 3.4 percent in the first
quarter, joining most of central Europe's other export-heavy
economies in a recession.
Governor Zdenek Tuma said the fall had hit bottom in the
second quarter and that the central bank expected quarterly
growth starting as of present.
At the same time, annual inflation was set to fall more from
the 1.2 percent recorded in June, before recovering to the
central bank's 2 percent target by the end of 2010, Tuma said.
"The outcome of the new forecast is that the inflation
outlook is lower for the nearest quarters which are relevant for
making monetary policy decisions," he told a news conference.
"In the external environment... this time it is apparent,
that the development is in the anti-inflationary direction in
all the key parameters."
Oil prices were the only pro-inflationary risk, while the
rise in the crown currency was a downside risk for prices, Tuma
said. The crown strength was among key factors analysts saw
behind the rate cut.
The bank now expects the economy to slide 3.8 percent in
2009, steeper than a 2.4 percent decline from a May outlook.
"We will... keep seeing quite poor numbers across the
economy in year-on-year figures," Tuma said. "But in
month-on-month or quarter-on-quarter numbers, the situation
should already look better."
The rebound next year is expected to be slower, with growth
of 0.7 percent instead of earlier 1.4 percent forecast, and the
bank saw household demand falling into negative figures in 2010.
"Behind this is a drop in households' disposable income and
growing unemployment," Tuma said.
LOOKING FOR AN END
Eleven out of 20 analysts polled by Reuters had expected no
rate move, and the rest forecast the cut. []
The Czech move followed easing elsewhere in the region,
including a cut of a full percentage point in Hungary last month
and a half point cut in Romania this week that brought both
countries' main borrowing rate to 8.5 percent.
In Poland, where interest rates have also fallen to an
all-time low of 3.5 percent even as the economy avoids
contraction, policymakers left rates unchanged last month.
"It was a surprise. They had hinted they could squeeze off
one more cut but we thought it wouldn't be necessary because of
evidence of green shoots in regional activity numbers," said
Koon Chow, emerging markets strategist at Barclays Capital.
"I think this is the last move."
Tuma however refused to say if there would be no more cuts,
saying the bank still had 1.25 percent to play with if needed.
The crown, a key inflation factor in the open economy,
dipped to 26.00 to the euro following the decision, but bounced
back slightly to trade at 25.94 by 1450 GMT, even with levels
from earlier in the day. The crown had lost 1.5 percent this
week on some speculation of a rate cut but has gained 14.4
percent from this year's February low.
For regional currency poll, click on []
(Writing by Jason Hovet and Jan Lopatka; Editing by Michael
Winfrey/Andy Bruce)
