(Adds c.bank comments, predictions, trader, updates crown)
By Jan Lopatka
PRAGUE, Feb 7 (Reuters) - The Czech central bank raised
interest rates by 25 basis points on Thursday to tame
inflationary pressures, as widely expected, but said the next
move could be in either direction as inflation and economic
growth cool.
The increase brought the key two-week repo rate to 3.75
percent, 200 basis points up since 2005.
The crown currency reacted by rising to near all-time highs,
but later fell after the bank forecast that market interest
rates will drop by next year.
The Czech move followed three other central banks in central
and eastern Europe that tightened the monetary screws over the
past week, while the Bank of England on Thursday loosened policy
due to growth concerns and the European Central Bank made no
change.
Czech rates remain the lowest in the European Union and
below the current inflation rate but analysts said they may not
go any higher due to an expected slowdown in both foreign and
domestic demand, especially if the currency remains strong.
The central bank cut its economic growth forecast for this
year to 4.1 percent from 5 percent, and next year's to 4.6 from
5.6 percent and reiterated it saw inflation falling next year.
"It is quite possible that the next (rate) move will be
upwards, and it is quite as well possible, if the risks
materialise in the opposite direction, that the next move will
be downwards," Central Bank Governor Zdenek Tuma said.
The crown briefly firmed after the decision before giving
back the gains. It later fell to 25.730 to the euro <EURCZK=> at
1610 GMT, off all-time highs at 25.545 on Thursday morning.
The currency has gained 9 percent against the euro over the
past 12 months as exports have grown and the negative Czech
interest rate spread versus the euro zone has narrowed to 25
basis points, following Thursday's decision.
Tuma said the crown's rise was tightening monetary
conditions, and would have policy implication if it continues.
Inflation jumped to 5.4 percent in December, far above the
central bank's target of 3 percent +/- 1 percentage point, and
analysts expect it to have surpassed 6 percent in January. The
data is due out on Friday.
The bank predicted inflation would fall back to 2.4 percent
in mid-2009, as the bank cuts its inflation target to 2 percent
as of 2010.
LOW MARKET RATE FORECAST
The bank for the first time revealed, in the form of a fan
chart, where it saw interbank market interest rates going,
although Tuma stressed there was no commitment for the
policymakers in the prediction.
The prediction showed a slight rise of the 3-month interbank
rate in early 2008 -- which may be reflected by the hike on
Thursday -- and then a fall to 3.2 percent at the end of 2008
and 2.9 percent in mid-2009, with rising uncertainty.
The forecast surprised some traders and analysts.
"The prediction is very low related to the current yield
curve," said Dalimil Vyskovsky, money market trader at Komercni
Banka.
"The alternatives will of course depend on economic
development, however the initial reaction of the market was of
course toward lower rates, forward rate agreements in the given
horizon went about 10 basis points down," he said.
- For a FACTBOX on CEE interest rates, click on []
- For Czech interest rate forecasts, click on []
(editing by Gerrard Raven)
