* IMF predicts Czech GDP to shrink 1.3 percent this year
* Fiscal gap seen at 3.3 percent of GDP
* Sees room for further monetary easing
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PRAGUE, April 14 (Reuters) - The Czech economy will shrink by 1.3 percent this year, the International Monetary Fund said on Tuesday, cutting its previous forecast for a 1.5 percent expansion.
The IMF predicted a fiscal gap of 3.3 percent of gross domestic product this year -- up from a previously predicted 2.5 percent -- and a 3.4 percent gap in 2010.
The IMF staff predictions accompanied a report from regular consultations between the IMF and the Czech Republic, concluded by the IMF executive board on Feb. 6 this year, following a November 2008 staff visit.
"The sharp downward revision reflects the deepening recession in the euro area, especially Germany, as well as deteriorating prospects for domestic demand," the IMF said.
"While investment is set to slow down markedly, especially in the key automobile sector, private consumption is projected to weaken further, reflecting dimmer prospects for employment and lower household confidence."
The forecasts put the IMF in line with Czech authorities and most analysts who have switched to predicting a contraction in output this year, following a slump in demand for Czech exports in the euro zone.
The Finance Ministry has said the economy may shrink by up to 2 percent this year.
The drop has been illustrated in export and output statistics. Data showed on Tuesday that industrial production slumped by 23.4 percent year-on-year in February [ID:nPRA002507].
"Given the prospect of a sharp economic downturn in 2009, it will be important to preserve financial stability and mitigate the impact of the downturn, using the flexibility gained from past sound policies," the IMF executive board said in a statement.
The IMF also said it saw scope for further interest rate cuts in light of an expected inflation drop. The bank last cut rates by 50 basis points to 1.75 percent on Feb. 5, a day before the IMF executive board concluded the Czech Republic consultation.
"With inflation projected to fall below the target of 3 percent and a sharp slowdown in prospect, there is scope for further prudent easing depending on movements in the crown and the extent of weakness in demand," the IMF said. (Reporting by Jan Lopatka; editing by Chris Pizzey)