(Adds quotes from news conference, updates crown)
By Jan Lopatka and Martin Dokoupil
PRAGUE, March 26 (Reuters) - The Czech central bank left
interest rates flat on Wednesday, meeting market expectations
that the strong crown currency would stay its hand after
tightening monetary conditions in the fast growing economy.
The crown currency slipped to a new six week low against the
euro after the decision, which left the key two-week repo rate
<CZRP=> <CZCBIR=ECI> at 3.75 percent, following a 25 basis point
hike in February and four hikes last year.
The bank voted 6-1 for stable rates, with one vote in favour
of a quarter-point tightening.
Some analysts expect the bank to raise rates once more in
coming months to quell inflationary expectations, but many
others believe the cycle has peaked and the next move may be a
cut next year.
"Unless the unions come with excessive demands for wage
hikes, which would raise inflationary expectations for
2009-2010, rates should remain unchanged throughout the rest of
2008," said Raiffeisenbank analyst Michal Brozka.
Central bank Vice-Governor Miroslav Singer said the crown
and weakening euro zone environment remained anti-inflationary
factors, but high inflation readings in the past months and the
danger that cost-side shocks filter into other prices have
clouded the picture and risks were large in both directions.
"I must say that we are in a situation where we really do
not know how the developments go, only upcoming data will
indicate, to a higher-than-usual extent," Singer told a news
conference.
The central bank has raised rates by 200 basis points since
late 2005 as the central European economy has powered ahead with
growth of more than 6 percent in each of the past three years.
Inflation soared to a 9-year high of 7.5 percent
year-on-year in January and February, but the bank has said the
spike was largely caused by one-offs such as tax hikes and that
inflation would slow rapidly by early 2009.
The bank targets inflation of 3 percent, +/- 1 percentage
point. The target will fall to 2 percent as of 2010, which will
affect policy decisions as soon as late this year.
CROWN DROPS, THEN RECOVERS
The crown initially extended earlier losses to the euro
<EURCZK=> after the decision, dipping to 25.65 from 25.61
earlier and 25.49 late on Tuesday, but it later regained
strength to 25.50.
The crown has gained 8.6 percent to the euro and 22.4
percent against the dollar over the past year, depressing the
prices of imports in the very open economy.
The central bank has said the crown's jump has gone far
beyond levels justified by strong growth and exports, and has
been in talks with the Finance Ministry on measures that could
stem the currency's rise.
It wants the government to funnel privatisation and other
foreign currency inflows outside the market in an already tested
scheme. It also proposed the government to once again refrain
from issuing Eurobonds as it did earlier this decade.
The plan knocked the crown further down from all-time highs
of 24.83 to the euro seen in early March. Analysts said this may
be a long-awaited correction of the move up, and predicted the
crown would return to its upward path later this year.
But Singer said on Wednesday ho deal had been reached so
far, which one trader said was the reason what the currency
returned to the Tuesday's closing levels.
(Reporting by Jan Lopatka; Editing by Michael Winfrey/David
Christian-Edwards)
