(Adds c.bank comments, details, updates crown)
By Petra Vodstrcilova
PRAGUE, Dec 17 (Reuters) - The Czech central bank cut
interest rates by half a percentage point on Wednesday and
painted a dark picture of economic development that promises to
more policy easing on the horizon.
The bank's move takes the main repo rate, used for
sterilising surplus liquidity, to 2.25 percent, its lowest level
since July 2006 and below the euro zone's 2.5 percent.
Two out of six board members called for 75 and 100 basis
point reduction as the global financial crisis strangles growth
in the export-reliant central European EU member more than
expected.
The Czechs' Wednesday move follows easing in its European
Union newcomer peers, ranging from a quarter point cut in Poland
last month to Hungary's twin 50-basis-point cuts since a 3
percentage point hike in October.
Vice-Governor Miroslav Singer said following the decision
that downside risks pointed to further cuts in borrowing costs,
as the central European economy battles with waning export
demand from the struggling euro zone.
He said the economy was falling behind the bank's forecast
made in November which saw growth at 2.9 percent next year and
inflation falling sharply, but was even deviating from a
pessimistic scenario which saw bigger decline in growth and
inflation.
"The economic development significantly deviates from the
basic scenario but also the alternative, in the
anti-inflationary direction," he said. "Everything is deep below
the forecast."
Asked directly about the next rate move, Singer said:
"The fact that we say that risks of the development are
ant-inflationary probably gives some answer.
The market had expected the 50 basis point move, although
some economists said the bank could have cut by 75 basis points
after the U.S. Fed chopped borrowing costs to near zero on
Tuesday.
The Czech bank is likely to cut below the 2 percent mark,
analysts said.
"It is difficult to assess how low interest rates could be
set due to fair amount of uncertainty, but we expect to see the
key two-week repo rate closer to 1 percent than 2 percent,"
4CAST analysts said in a note to investors.
"This will depend on how severe the economy suffers on the
back of global crisis, but at this stage the outlook does look
gloomy."
The Czech crown <EURCZK=> showed little reaction to the rate
vote, dipping to 26.385 to the euro, from 26.40 before the
decision, but it recovered to 26.28 by 1543 GMT.
Inflation fell sharply in October and was more than a
percentage point below the bank's expectations, while
manufacturing in the industry-heavy country shrank as demand
from the main Czech export market, the euro zone, collapsed.
A 75 basis point reduction by the ECB earlier this month
meant Czech rates rose above those in the euro zone for the
first time in almost four years.
(For HIGHLIGHTS from news conference, click on [])
(Additional reporting by Jana Mlcochova)
