* Rates flat, in line with expectations
* Crown flat, budget in focus
* For Highlights double click on []
(adds comments from news conference, analyst)
By Jana Mlcochova
PRAGUE, Sept 24 (Reuters) - The Czech central bank kept
interest rates flat on Thursday and in line with expectations as
the inflation outlook remained low, the currency strong and the
economy showed only weak signs of recovery.
Five of the bank's seven board members voted to leave the
main two week repo rate <CZEBIR=ECI> <CZRP> at a record low of
1.25 percent, while two dissenters supported a 25 basis point
cut which would put rates on par with the European Central Bank.
Analysts said the Czech easing cycle could be at a bottom,
but the dissenting votes could hold out the chance of one more
cut, especially if politicians approve tighten the budget.
Poland is seen at an end after a similar easing cycle while
in Hungary, which delayed cuts earlier this year due to
financial stability concerns, rates are expected to drop to 7.5
percent after an expected 50 basis point cut on Sept. 28.
"Since the previous board meeting until today, we see the
risks in a rather anti-inflationary direction," central bank
Governor Zdenek Tuma told a news conference after the decision.
But he said the board discussed whether a small cut in the
already low rates made economic sense, after the bank cut rates
by 250 basis points since August last year.
The Czech export-driven economy contracted by a record 5.5
percent in the second quarter, and the bank predicts just 0.7
percent growth for the all of 2010.
Inflation has dropped to 0.2 percent year-on-year in August
and the bank expects it to climb to 1.9 percent at the end of
the next year, just below its target of 2 percent.
DOWNSIDE RISKS
The crown <EURCZK=>, which has been stronger than the bank
forecast and thus helped push prices down, showed no reaction to
the decision, trading flat on the day at 25.15 to the euro.
All 18 analysts polled by Reuters had predicted the
policymakers would keep rates unchanged on Thursday.
The country's budget has sunk into a deep deficit and the
government has warned the country would have to ask for an
International Monetary Fund (IMF) loan some time down the road
if politicians took no action.
Party leaders were in talks on Thursday to agree on a
package of budget cuts to bring the 2010 total fiscal gap to
around 5 percent of GDP from the proposed 7.4 percent.
[]
This would make the Czech Republic one of the first
countries in Europe to start reducing the budget deficit that is
not urged by the IMF.
Finance Minister Eduard Janota said the austerity package
would take 0.6 percent off growth next year, resulting in an 0.3
percent contraction.
Tuma said he would welcome the fiscal consolidation plan as
the right step, which could have an anti-inflationary effect.
Large deficits could lead to higher rates, he said.
Some analysts said fiscal consolidation could support one
more policy easing.
"We are in favour of stable rates for next 2 quarters (and
then hike)," said Martin Lobotka, an analyst at Ceska
Sporitelna.
"Stronger crown or negative economic data once government
support is withdrawn can bring another cut, though."
(Additional reporting by Jason Hovet; Editing by Ron Askew
and Andy Bruce)
