(Adds quotes, background, updates crown)
By Jan Lopatka
PRAGUE, Feb 5 (Reuters) - The Czech central bank slashed
interest rates by half a percentage point on Thursday, in line
with expectations and matching an all-time low for rates as the
economy stalls due to collapsing euro zone demand.
The bank cut the main repo rate to 1.75 percent, the lowest
since mid-2005 and 25 basis points below the European Central
Bank, which was expected to hold rates flat later on Thursday.
The reduction brought cumulative monetary easing in the
Czech Republic to 200 basis points since August, when the bank
started cutting with the evaporation of inflation risks amid the
global economic crisis.
"I would say this is not the end of the road for lower
interest rates," said David Marek, chief economist at Patria
Finance. "In the middle of the year, we could be as low as 1
percent."
The crown currency firmed to 28.26 to the euro <EURCZK=>
after the announcement, from 28.400 before the decision,
bouncing back after some investors closed positions in
anticipation of a bigger cut in the return for holding crowns.
The bank gave no details but called a news conference for
1430 GMT. It will present new 2009 growth forecast, expected to
be close to zero, significantly below October estimates of 2.9
percent expansion.
A string of poor economic data, including December foreign
trade figures released earlier on Thursday, has led some
analysts to believe that the Czech economy shrank already in the
fourth quarter last year.
But central bank board members have said that the weakening
of the crown in the past months has limited the room for further
policy easing.
NERVES
Analysts said sharply weaker currency rates across central
Europe will likely force some banks, particularly those who
struggle with large balance of payment problems and large stock
of foreign currency loans, to slow or halt rate cut cycles.
They said Hungary, Romania, Serbia and the Baltics are the
most vulnerable while Poland and the Czech Republic are safer
and should be less concerned over record currency weakness.
"Where there are no large balance of payment problems and
serious risk premia, rate cuts are easier," UBS economist Gyorgy
Kovacs said.
"It's no accident the Czechs and Israel started the rate cut
cycle first... while clearly Hungary and Romania need to be very
cautious."
The crown has lost nearly 6 percent since the start of the
year, but it is still the best performer among central European
currencies, which have all suffered heavily as investors dumped
risky emerging market assets.
The crown has fallen 19 percent since its all-time peak last
July, when exporters suffered from what they said was
unsustainable currency strength.
The Czech central bank is expected for the first time ever
to present an expected exchange rate path at Thursday's news
conference.
The bank does not target any currency level, but pays close
attention to crown moves due to their significance for inflation
in its open economy.
(Additional reporting by Balasz Koranyi in Budapest, editing by
Patrick Graham)
