*C.banker Tomsik: crown strength gives room for rate cut
*High crown appreciation could hit c.bank growth forecast
By Jana Mlcochova
PRAGUE, April 22 (Reuters) - The recent rise in the Czech
crown threatens the central bank's forecast that inflation will
rise to its 2 percent target over next twelve to eighteen months
and offers scope for a further easing in interest rates, central
bank board member Vladimir Tomsik said.
The crown <EURCZK=> has risen by just over 6 percent over
the past year and hit a seven-month high of 25.015 per euro on
April 15. The central bank forecasts an average exchange rate of
at 25.8 in the first quarter of this year.
Czech official interest rates reached a record low in
December after the main two-week repo rate <CZCBIR=ECI> was cut
to 1 percent in December, the same as euro zone levels.
"The latest significant strengthening in the exchange rate
is rather dangerous, mainly because it can threaten our outlook
for a fragile, export driven recovery," Tomsik said in an
interview cleared for release on Thursday.
"An overly strong exchange rate can jeopardize the whole
macroeconomic outlook, not only exports, but our entire
forecast, including that we will not move to the inflation
target."
Tomsik said the crown's strength threatens the bank's
forecast for 1.4 percent growth this year, driven by net
exports, and for inflation to approach the bank's 2 percent
target from its current 0.7 percent.
"If this outlook is threatened, than the question is whether
it is not appropriate to cut rates further," said Tomsik, who
voted for a cut already at the March 25 rate-setting meeting but
was outvoted by a majority which endorsed flat rates.
Tomsik said an annual real appreciation in the exchange rate
of 2 to 3 percent was in line with an economic convergence of
the east European economy with the richer West. Real
appreciation has now merged with nominal due to similar
inflation levels in the Czech Republic and the euro zone, he
said.
But since the convergence process halted last year as the
Czech economy shrank along with the euro zone, the question was
whether a 3 percent appreciation was acceptable this year and
whether it should not be less, Tomsik said.
"I personally think that a sustainable pace should be lower
with regards to the fact that we temporarily stopped in the
convergence process."
EURO ZONE RATES
One of the main reasons why Tomsik voted for a rate cut in
March was the lower outlook for euro zone market rates, he said,
adding he saw this risk continuing.
"A rise in market interest rates in the euro zone has been
lagging (expectations) significantly... On the long end, the
euro yield curve drops by more than 100 basis points which is a
significant change for the financial world," Tomsik said.
Euro market rates were expected to pick up after the
European Central Bank phases out extraordinary credit support
measures. But the bank has been slower than earlier expected in
removing those measures, helping keep the euro yield curve
lower.
Tomsik was in the minority camp calling for lower rates in
March with Vice Governor Miroslav Singer who said on Wednesday
he could not exclude a further rate cut. []
Vice-Governor Mojmir Hampl, who voted against a cut, said
earlier this week it was still a question when the interest rate
easing cycle would end and that he saw new disinflationary
risks. []
Another of the seven Czech rate-setters Eva Zamrazilova, who
said she was comfortable with the present rate level, will miss
the next meeting on rates on May 6, when the bank should also
release a new forecast. []
Interest rate trader at Komercni Banka Dalimil Vyskovsky
estimated money markets have priced in a 70-80 percent chance of
a quarter-point cut in May.
