* Better keep rates stable in uncertainty
* Cutting rates could cause crown volatility
* Risks to inflation fcast both on upside and downside
* Not in favour of interventions, other tools
By Jana Mlcochova
PRAGUE, Oct 26 (Reuters) - Czech interest rates should stay
flat until the global economy recovers as more easing would have
a limited impact on market rates and could cause crown
volatility, central bank board member Robert Holman said on
Monday.
Holman told Reuters in an interview that decision-making on
rates was surrounded by an exceptionally high level of
uncertainty related to risks to the bank's inflation forecast.
"Should I make a decision at a time of an increased level of
uncertainty then I will always prefer stability in interest
rates, rather then contemplating whether they should be changed
in this or that direction," said Holman, who voted with a
majority for stable rates at the last meeting on Sept. 24.
Czech borrowing costs are at a record low of 1.25 percent
after rate-setters chopped 2.50 percentage points from the main
two-week repo rate <CZCBIR=ECI> since August last year to prop
up growth while inflation pressures remained weak.
Holman's comments are in sharp contrast to remarks by
Governor Zdenek Tuma and Vice Governor Miroslav Singer, who said
earlier this month the bank would debate more policy easing.
They were two lone votes for a 25 basis point cut at the
September meeting.
The Czech Republic was in recession earlier this year with
consecutive quarter-on-quarter declines in gross domestic
product in the last three months of 2008 and the first quarter
of this year. However, its currency has recovered by 13.6
percent since this year's low, tightening monetary conditions.
The central bank said after the last meeting risks to its
inflation forecast had shifted moderately to the downside due to
the stronger than expected crown and lower-than-forecast
inflation data.
Annual inflation was at zero in September, below the bank's
forecast, and the bank said it could briefly dip below zero.
This is far below the bank's January 2010 target of two percent,
with a tolerance band of plus or minus one percentage point.
But Holman said he could not say downside risks dominated.
"It's not the case that I would now say that we live in
times of anti-inflationary risks and this is what worries us
because that would mean that we should lower interest rates. I
certainly would not say that."
He said the main pro-inflationary risks included development
in wages and in prices of some commodities, namely oil.
He said he had not yet firmly decided how he would vote at
the bank's next rate-setting meeting on Nov. 5, and must read
the next situation report to make a final decision.
But it was better for the economy if rates were stable
rather than often changed, he said.
Further rate-lowering could threaten crown stability, he
said.
"Interest rates are so low that their further lowering could
cause an unpredictable development of the crown," he said,
pointing to foreign exchange markets reacting to interest rate
differentials. "I would not like to see that by lowering rates
we would shake the exchange rate."
He said he was happy the crown had stabilised around
25.00-26.00 per euro level, which he said was appropriate.
NO NEED FOR NON-STANDARD EASING TOOLS
Governor Tuma warned that continued crown firming could lead
to protracted deflation and said the bank would consider
intervening on the foreign exchange market to weaken the crown
and had six to seven ways to ease policy. The crown has weakened
1.8 percent since Tuma's remarks.
But Holman said non-standard easing tools were unnecessary.
"The Czech central bank is not in a situation that it would
seriously consider that it would use some other alternative
tools...," Holman said.
"I would prefer if we did not use any alternative tools. If
you ask about my personal estimate, then I estimate that we will
not do it, that the situation here does not require anything
like that."
The bank will release the main points of its fresh quarterly
macroeconomic forecast at the meeting on Nov. 5.
The Polish central bank board meets on Wednesday and is
expected to keep rates unchanged at 3.5 percent due to
persistent inflation.
In Hungary, one of the countries worst hit by the global
recession, the central bank may cut rates further due to low
price pressures and plentiful spare output capacity,
Vice-Governor Julia Kiraly said on Friday [].
(Reporting by Jana Mlcochova; editing by Stephen Nisbet)
