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UPDATE 2-Czech cbank holds rates, policy outlook uncertain

Published 12/22/2010, 11:36 AM
Updated 12/22/2010, 11:40 AM

* Main rate stays at 0.75 percent, lowest in CEE

* Governor sees great uncertainties abroad

* Cites euro zone crisis, commodity prices

* Says any move in rates possible, and sooner than f'cast

(Adds Governor comments, analyst)

By Jana Mlcochova and Robert Mueller

PRAGUE, Dec 22 (Reuters) - The Czech central bank held borrowing costs as expected on Wednesday, and said mounting uncertainty over how the euro zone's debt crisis will play out meant the direction of its next rate move was unclear.

All analysts in a Reuters poll had forecast the bank would keep the two-week repo rate at a record low 0.75 at its final meeting of 2010.

A majority believed rates would start to rise by the middle of 2011, later than elsewhere in central Europe, as growth slowed while inflation stayed benign. None had forecast a cut.

Governor Miroslav Singer told a news conference the euro zone's debt struggles, rising commodity prices and Germany's economic outperformance were close to becoming risks to the bank's outlook.

"They are certainly significant uncertainties," Singer said. "They have the capability to turn into relatively big risks that may force us into some moves earlier than what we expect now according to the forecast, whether that be up or down.

The market did not react to Singer's comments, with the shortest-dated forward rate agreement, showing three-month rates in one months time, unchanged at 1.219/279 percent.

The crown was flat in slow holiday trade at 25.26 to the euro.

'LEAVING THE DOOR OPEN'

"Any further easing is (or should be) in our view out of question but bankers obviously leave the doors open for anything that may come," Ceska Sporitelna analyst Martin Lobotka said in a note following the bank's news conference.

The bank voted 6-1 to hold the repo rate, used to skim surplus liquidity, for the eighth month running.

One board member, as yet unnamed, voted for a 25 basis point rise. Ratesetter Eva Zamrazilova had voted for a hike at the past two meetings.

The bank's latest forecast in November showed a rise in interest rates starting towards the end of 2011.

But Singer's comments chimed in with signs of a recent shift towards a more dovish outlook from a second ratesetter.

Vice Governor Mojmir Hampl told Reuters last week that fallout from the euro zone debt crisis was increasingly likely and policy could be eased if it materialised.

Singer said on Wednesday it was possible to observe a "double-track" development in the economy with one part still struggling to get out of crisis while some companies were already planning their next expansion.

He added risks to the bank's forecast were balanced and the economic development showed the bank's forecast was materialising.

Lower than forecast growth in nominal wages was the key downside risk while growing commodity prices and a weaker crown rate were the main upside risks, he said.

The bank surprised markets with its economic outlook in November in which it predicted the next year's GDP growth at 1.2 percent, a sharp deceleration from this year's expected 2.3 percent. It said budget cuts, among others, will knock growth down.

The Polish central bank also kept rates on hold on Wednesday and is seen hiking early in 2011, while Hungary's central bank raised borrowing costs to 5.75 percent on Monday.

(Writing by Jason Hovet and Jana Mlcochova; Editing by John Stonestreet)

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