(Adds quotes, background, updates crown)
By Jan Lopatka
PRAGUE, March 26 (Reuters) - The Czech central bank left
interest rates flat on Wednesday, meeting market expectations
that the strong crown currency would stay its hand after
tightening monetary conditions in the fast growing economy.
The crown currency slipped to a new six week low after the
decision, which left the key two-week repo rate <CZRP=>
<CZCBIR=ECI> at 3.75 percent, following a 25 basis point hike in
February and four hikes last year.
Some analysts expect the bank to hike rates once more in the
coming months to quell inflationary expectations, but many
others believe the cycle has peaked and the next move may be a
cut next year.
"We can thank the crown's strength in recent months for the
interest rates not having gone up with inflation at current
levels," said Raiffeisenbank analyst Michal Brozka.
"Unless the unions come with excessive demands for wage
hikes, which would raise inflationary expectations for
2009-2010, the central bank's rates should remain unchanged
throughout the rest of 2008."
The bank gave no comment on the decision but called a news
conference for 1430 GMT.
The central bank has raised rates by 200 basis points since
late 2005 as the central European economy has powered ahead with
growth of more than 6 percent in each of the past three years.
Inflation soared to a 9-year high of 7.5 percent
year-on-year in January, but the bank has said the spike was
largely caused by one-offs such as tax hikes and that inflation
would slow rapidly by early 2009.
The bank targets inflation of 3 percent, +/- 1 percentage
point. The target will fall to 2 percent as of 2010, which will
affect policy decisions as soon as late this year.
CROWN WEAKENS
The crown extended earlier losses to the euro <EURCZK=>
after the decision, dipping to 25.65 from 25.61 earlier and
25.49 late on Tuesday.
"Perhaps a few people expected a (rate) change in the corner
of their minds, so maybe there is a little bit of space for
crown weakening - possibly toward 25.700 in several days, but I
would probably not expect more," said one Prague dealer at a
foreign bank.
He said a London-based bank had been buying euros since the
morning. Some analysts attributed the crown drop to strong
German business confidence data earlier on Wednesday that lifted
the euro across the board.
The crown has gained 8.6 percent to the euro and 22.4
percent against the dollar over the past year, depressing the
prices of imports in the very open economy.
The central bank has said the crown's jump has gone far
beyond levels justified by strong growth and exports, and has
been in talks with the Finance Ministry on measures that could
stem the currency's rise.
It wants the government to funnel privatisation and other
foreign currency inflows outside the market in an already tested
scheme. It also proposed the government to once again refrain
from issuing Eurobonds as it did earlier this decade.
The plan knocked the crown further down from all-time highs
of 24.83 to the euro seen in early March. Analysts said this may
be a long-awaited correction of the move up, and predicted the
crown would return to its upward path later this year.
(Reporting by Jan Lopatka; Editing by Michael Winfrey)
