* WHAT: Czech central bank meets on rates on Thurs, Feb 4
* WHEN: Decision at 1200 GMT, news conference at 1330 GMT
* REUTERS FCAST: Keep 2-week repo rate <CZCBIR=ECI> at 1 pct
* Hike seen in Q2-Q3
* For TABLE with individual fcasts click on []
By Mirka Krufova
PRAGUE, Jan 28 (Reuters) - The Czech central bank looks
certain to keep interest rates unchanged at a record low when it
meets on policy next Thursday as a feeble growth will not allow
for demand-led price pressures on the monetary policy horizon.
Markets price in roughly three quarter point hikes by the
year's end, after most rate setters said the easing cycle was
closed with a quarter point cut in December and tightening would
follow later in the year.
Czech borrowing costs are at a record low with the two-week
repurchase agreement rate <CZCBIR=CEI> used to drain access
liquidity based on an agreement on purchase and buyback of
securities.
Here are some possible outcomes of the Czech central bank's
monetary policy board meeting and the subsequent news conference
by its governor, due on Feb 4, as well as the expected market
reaction:
RECORD LOW RATES TO STAY FOR NOW
The bank will likely hold rates steady. It will maintain a
cautious view of a recovery abroad, key for the condition of the
small and open Czech economy, which it had said in December was
a downside risk to its inflation outlook.
It may try to open a door for an interest rate increase in
coming months in line with the bank's forecast which sees a
gradual exit from extraordinarily loose monetary policy.
It may point out that demand-led inflation pressures are
negligible for now as rising unemployment and higher taxes weigh
on domestic demand.
The bank will release the main features of its new quarterly
macroeconomic outlook. It is likely to stick to its view of a
double-dip recovery-- with the second dip shallower-- but it may
upgrade its outlook for 2010 GDP growth. Vice-Governor Miroslav
Singer said he expected 2010 growth around 2 percent. In its
November forecast the bank saw 1.4 percent expansion in 2010.
[]
Inflation will likely be again forecast as roughly reaching
the bank's 2 percent target on the policy horizon.
"The best approach would be to keep rates on hold as
tightening too early could weigh on fragile recovery," said
Piotr Matys, an analyst at 4Cast.
*Probability: High. All 21 analysts surveyed by Reuters
predicted the bank would stay put in February. Eleven saw a hike
coming in the third quarter. Six saw it as soon as the second
quarter.
*Market reaction: Markets would likely remain unchanged
following the decision. The crown <EURCZK=> and yields may edge
up if the governor's comments suggest rates should rise in the
course of the year. Money market rates may rise if comments
indicate a hike would come before the end of the first half of
the year.
BANK FLAGS HIKE COULD COME SOON ON RECOVERY
The governor may indicate it is not desirable for interest
rates to be kept at an extremely low level for a long time and
the expected gradual recovery calls for implementing a tighter
policy soon.
Board member Robert Holman said a repo rate at 1 percent was
too low and was corresponding to an economic recession while an
outlook for a revival called for higher rates.
*Probability: low
*Market reaction: The crown <EURCZK=> and money market rates
<CZKF=> would jump as it would prompt investors to increase bets
on an early rate hike.
RATES RAISED OR CUT FURTHER
The bank is highly unlikely to raise or cut rates further
from the record low levels at the Feb session.
A further cut is unlikely after Governor Zdenek Tuma, who
led the rate cut advocates on the seven-strong policy board at
the last four sessions, said rates may have reached their lowest
in the present easing cycle. []
As for a hike, no analyst predicted the bank would reverse
policy so quickly after a 17-month long easing cycle as no
imminent inflationary pressures are seen.
*Probability: extremely low in both cases.
*Market reaction: If rates were hiked the crown <EURCZK=> as
well as money market rates <CZKF=> and treasury bond yields
would jump. In the event of a cut, the crown would weaken and
market rates and would drop.
(Reporting by Jana Mlcochova; Editing by Andy Bruce)
