* Rates cut to record fresh lows, markets surprised
* Crown falls, market interest rates ease
* Press conference on decision at 1230 GMT
(Adds analyst, update market reaction)
By Jana Mlcochova
PRAGUE, May 6 (Reuters) - The Czech central bank surprised
the market with a 25 basis point interest rate cut on Thursday,
defying analyst expectations for no change as the economy
recovers and the Greek debt crisis drags down the crown
currency.
The move brought the main two-week repo rate <CZCBIR=ECI>
<CZRP=> used to drain excess liquidity to a new record low of
0.75 percent, below the euro zone's main refinancing rate which
was confirmed at 1 percent on Thursday.
The Lombard rate used for overnight lending to banks was cut
25 basis points to 1.75 percent, and the discount rate paid to
banks for overnight deposits was left unchanged at 0.25 percent.
The decision extended a rate-cutting cycle most analysts
thought had already finished, and knocked the crown 0.5 percent
down to 26.1 to the euro. It traded at 26.02 at 1144 GMT.
Sixteen out of 19 analysts surveyed by Reuters had expected
no change and the market had erased earlier pricing in for a
rate cut as the Greek crisis put pressure on the crown in recent
days.
"After the Greek problems escalated and the crown weakened,
we did not expect a cut," said Pavel Sobisek, chief economist at
UniCredit in Prague.
Sobisek was one of the few analysts who had expected a cut
in the Reuters poll, but said he changed his mind in the latest
days as the crown, a key price factor in the highly open
economy, shed 2 percent since Monday.
Short-end interest rate swaps dropped by 5-7 basis points,
with the two-year swap quoted 6 points down at 1.77/83 percent.
"The surprise is that the central bankers gave priority to
the inflation forecast to what is happening on the financial
markets. I take it to mean that they consider the crown
weakening caused by Greece to be temporary," Sobisek said.
Solid economic recovery also supported stable rates,
analysts said, although several central bankers have said in
recent weeks that they saw additional disinflationary pressure.
Central bank Vice-Governor Mojmir Hampl, who had voted for
stable rates at the previous meeting, joined two other dovish
board members on April 19 saying he saw additional
disinflationary pressures [].
The Czech Finance Ministry as well as the European
Commission have in the past week raised their growth forecasts
for this year, to 1.5 and 1.6 percent respectively.
The central bank is due to release a new quarterly inflation
and growth forecast, which was the basis for Thursday's
decision, at a news conference called by Governor Zdenek Tuma
for 2.30 p.m. (1230 GMT).
The latest forecast did leave the option of some lowering
open, though the main scenario was that rates would remain flat
until a tightening later this year.
FRA markets, which earlier priced in a greater than a 50
percent change of a cut, curbed bets on rate easing this week
following a steep drop in the crown <EURCZK=>.
(Editing by Ron Askew)
