* Risk of lower potential output a reason for stable rates
* Rates could go either way, depending on risks
By Jana Mlcochova
PRAGUE, Nov 18 (Reuters) - The next move in Czech interest
rates could either be a cut or a hike and it should not be
assumed they were at their lowest despite a risk inflation could
rise above expectations, central bank Vice Governor Mojmir Hampl
said.
The bank has axed borrowing costs in six cuts since August
last year by a cumulative 2.5 percentage points to a record low
of 1.25 percent, and its fresh economic forecast assumes more
easing.
Hampl's vote helped form a tight 4-3 majority at the bank's
Nov 5 meeting which left rates flat.
As a deputy governor he was the most senior member on the
board to defy the governor and the other vice governor who
called for a 25 basis point cut.
The development in the balance of risks to the bank's
forecast was key for Hampl's next decision on rates, he told
Reuters in an interview.
But for now one of the main risks was that the economy could
emerge from the crisis with lower potential output, which could
lead to a rise in demand-led price pressures, requiring tighter
monetary conditions, he said.
"There is a great uncertainty whether the crisis has not led
to a sudden one-off change in the potential output of our
economy," Hampl said in remarks agreed for publication on
Wednesday.
"If that was the case... then rates should be higher (than
they are now)," he said.
The board debated the notion of slower productivity growth
as part of a sensitivity analysis to the new baseline economic
forecast.
The bank's latest labour market outlook showed wage growth
could dip less and unemployment growth could be slower than
assumed earlier, suggesting demand may not fade as fast as
expected.
Also, demand had a long-lasting momentum and although it was
weak there was a risk it would at some point overrun production
capacity.
Hampl said as a caveat that his forecast could be wrong and
noted that his views a year ago that the country needed
moderately stricter monetary policy conditions had not
materialized.
OTHER RISKS MAY PREVAIL, RATES CAN CHANGE
The baseline scenario of the bank's staff forecast made
available for the last meeting shows room for further policy
easing as it forecasts the three-month interbank rate (PRIBOR)
at 1.1 percent in the fourth quarter this year, below the
present two-week repo rate <CZCBIR=ECI>.
The forecast implies a cut even though monetary
policy-relevant inflation is forecast below target. Headline
inflation, however, is forecast above target due to one-off
indirect tax hikes.
But the sensitivity analysis that Hampl cited showed a touch
higher PRIBOR and inflation, a weaker crown <EURCZK=> and slower
growth, suggesting higher interest rates.
But the balance of risks could swing in any direction before
the board's next rate meeting, on Dec. 16, Hampl said, and other
risks could rise, overshadowing his present worry of a dip in
potential.
"My last decision and arguments that led me to it definitely
do not mean that at some other time in future there will not be
other stronger arguments..." he said. "Rates can of course
change. They can change in both directions."
The board was split twice in a row on whether to cut or hold
rates, with Governor Zdenek Tuma overruled by a majority both
times. In previous rate decisions, he has led the majority.
Tuma and the other two dissenters saw the economy still
under pressure and urged a cut to bring inflation to the bank's
new 2 percent target from -0.2 percent in October.
Central banks in the region are either in an easing cycle or
have switched to a neutral bias. Hungary's policymakers are
widely expected to cut rates next Monday, while in Poland, the
bank kept rates on hold and is likely to remain in a neutral
mode in coming months.
