* Central bank surprises with 25 bps rate cut
* Rates at record low, on par with ECB
* Crown weakens, money market rates fall
(updates crown, other market reaction, analyst)
By Jana Mlcochova
PRAGUE, Dec 16 (Reuters) - The Czech central bank surprised
markets on Wednesday with a 25 basis point cut in its main
interest rate to a new record low, showing the bank's concern of
protracted economic weakness.
Policymakers trimmed the main two-week repo rate
<CZCBIR=ECI> <CZRP=>, used to skim off excess liquidity, to 1.00
percent, bringing it in line with the euro zone's main rate and
far below rates in other non-euro central European countries.
The crown <EURCZK=> weakened as much as 0.7 percent to
26.275 per euro following the decision but later firmed back to
around 26.225, slightly above Tuesday's closing levels. Money
market rates dropped.
Analysts had said the decision would be a close call and the
market had priced in a 25-50 percent chance of a cut, but most
banks had forecast no change due to losses of 0.6 percent for
the crown in the last month and a pick-up in inflation.
"Today's decision is a bit surprising when seen in the
context of recently released data and growing risk aversion in
financial markets," said Radomir Jac, chief analyst with
Generali PPF Asset Management.
"Risk aversion and the possibility of a weaker crown were
the key reasons for keeping interest rates on hold in November."
Analysts and dealers pointed to board member Eva
Zamrazilova, who voted for stable rates in November, as the
voter most likely to have swung the balance on the seven strong
board.
She said last week she saw room for a cut if there were no
inflation pressures on the horizon [].
Most economists said the move was probably the last cut in
the present easing cycle and months of stability were now most
likely.
The bank also cut the Lombard rate, used for overnight
lending to banks, by 25 basis points to 2.0 percent. But it left
the discount rate paid to banks for overnight deposits unchanged
at 0.25 pct, breaking the custom of moving all rates
simultaneously.
Money market rates <CZKF=> fell, with one week interbank
rates <CZKSWD=> down to 0.85/1.18 at 1149 GMT from 1.05/1.35
before the decision. Forward Rate Agreements <CZK3X6F=>,
contracts betting on future changes in interest rates, eased to
1.52/1.57 from 1.62/1.67, according to Reuters data.
CROWN IN SPOTLIGHT
Dealers said the cut boosted the likelihood that the crown
would be used as a funding currency of carry trades, which use
currencies with low interest rates to invest in higher yielding
ones.
"The crown has the lowest rates in the region and in the
case of a negative outlook for the region all currencies in the
region would weaken in the same way," said David Navratil, an
analyst at Ceska Sporitelna.
Analysts believe the highly open Czech economy has probably
passed the worst but they do not expect any strong upturn and
there are substantial political and budget risks ahead of an
election next year.
The economy shrank at 4.1 percent in the third quarter, less
than the bank forecast for a 4.9 percent contraction. It grew
0.8 percent on quarterly basis.
But a shrinking household consumption and worsening labour
market threatening to suppress demand and subsequently price
growth, justified views of the need for more easing.
Consumer inflation was 0.5 percent in November, above the
bank's forecast for 0.1 percent. The bank targets consumer
inflation at 2 percent with a tolerance band of 1 percentage
point either side.
(Reporting by Jana Mlcochova; Editing by Patrick Graham)
