* Czech c.bank chief says discussed FX intervention
* Would consider stepping into market if crown keeps firming
* Rate cut possible if currency strong
* Crown slips to 3-week low vs euro after comments
(Adds quotes, background)
By Toni Vorobyova
ISTANBUL, Oct 5 (Reuters) - The Czech central bank would
consider intervening on the foreign exchange market to weaken
the crown or cut interest rates if the currency keeps firming,
although the bank is no fan of intervention, Governor Zdenek
Tuma said on Monday.
Tuma told Reuters in an interview the bank discussed market
intervention, among other possible measures, when it last met on
policy on Sept 24.
The bank cut interest rates to an all-time low of 1.25
percent in August, as the export-driven economy suffered from a
slump in foreign demand, and most analysts predicted the easing
cycle to be over.
The bank left rates flat at last month's meeting but Tuma
and his vice-governor Miroslav Singer voted for another 25 basis
point easing, an extraordinary occurrence when the governor
voted with the minority, sparking speculation the bank may cut
more.
The argument against easing was that rates were already low
and the effect of another cut was questionable, which prompted
discussion of alternative ways to ease policy.
"The question is whether we can loosen monetary policy in a
different way other than interest rate cuts," Tuma said.
"One option in an economy where the exchange rate risk is
quite important could be intervention in the currency market."
Tuma said the discussion may return when the bank's board
next meets on Nov 5.
"It's officially a managed float, so it means we reserve
that option in certain situations ... But otherwise we are not
fans of interventions, it's quite the reverse of what we have
been doing in the last 5 or 10 years."
Asked if the bank would consider intervening if the currency
continued to firm, Tuma said:
"Would consider. It doesn't mean it would do it. But it (the
bank) would consider all options, including interest rate cuts
and other potential scenarios."
The crown dropped 0.3 percent to a 3-week low after Tuma's
comments to 25.5250 per euro <EURCZK=>. But it was still 5
percent up since January, outperforming regional peers to the
potential detriment of Czech exporters.
"The big risk (to the Czech economy) is the foreign exchange
rate. If it appreciates further I think we have a problem, and
then it's very likely we will respond by a rate cut," Tuma told
Reuters financial television in a separate interview.
"I always argue that the only barrier for interest rates is
zero."
The central bank's inflation forecast -- a key driver of
monetary policy -- sees inflation gradually climbing up to 1.9
percent at end-2010, just below the bank's 2 percent target. The
prognosis is due to be updated in November.
"I can hardly imagine that our (next) inflation forecast
will point to higher inflation in the next year. The economy
will be going slightly up, very moderate growth," Tuma said.
"I don't see for the foreseeable future significant
inflation risk...I don't see any other risks to financial
stability so that means I should vote for a cut."
Vice-governor Singer said on Monday that more monetary
easing could not be ruled. []
Tuma backed the government austerity package which aims to
slash the budget deficit to 5.2 percent of gross domestic
product with $4 billion of tax hikes and spending cuts,
unwinding anti-crisis measures sooner than most other countries.
"I believe it is appropriate," he said.
"Access to borrowing is more difficult for countries like
the Czech Republic. I would expect that the UK would be able to
borrow its ... budget deficit for some time, and I would expect
Czech Republic would reach some limits in financial markets or
it would be borrowing (at higher cost) in the near future" if
the government had not taken steps to narrow the gap.
(Writing by Jan Lopatka and Toni Vorobyova; Editing by Ruth
Pitchford)
