Czech central banker sees lower rate path

By Jan Lopatka

VIENNA (Reuters) - The strength of the crown currency will likely lead to a lowering of the interest rate trajectory in the Czech central bank's (CNB) new inflation forecast, Vice-Governor Ludek Niedermayer said on Monday.

Niedermayer told the Reuters Central European Investment Summit that some other factors such as a tight labor market were working in the opposite direction, but in general there had been a shift down with regard to the likely rate path.

The Czech central bank has hiked interest rates three times this year to 3.25 percent, with the last tightening in August, as the inflation outlook pointed to a spike in price increases, in part because of tax changes due in January.

But the crown climbed to record highs against the euro last month, driven by risk aversion which led to the unwinding of carry trades using the crown or the yen as funding currencies to hold positions in higher-yielding assets.

A strong crown dampens import prices and is a key inflation factor in the small, open central European economy that has been expanding by more than 6 percent.

"What is clearly a factor reducing a lot of pressure to increase the interest rates is the appreciation of the currency. Compared to the situation when we were preparing the previous forecast, the currency is much stronger," Niedermayer said.

The second factor was the softer interest rate environment in the euro zone, which the central bank reflects in its foreign exchange rate expectations, he said.

Asked if it was likely the new quarterly forecast, due on October 25, would imply lower interest rate path than the previous hawkish one, Niedermayer said: "This is what I would expect."

He declined to be more specific on the size or timing of future rate changes.

"You have mixed signals, something is pointing down, something is not pointing so much down, and all this is taking place on the background of the previous forecast that was expecting (a) substantial increase of interest rates," he said.

Analysts forecast the bank to keep rates flat this month, a Reuters poll showed on Monday.

The last inflation forecast in July saw inflation climbing toward the 4 percent upper edge of the central bank's comfort zone in December, from 2.8 percent in September. The central bank has a 3 percent inflation target, with a tolerance band of plus or minus 1 percentage point.

Niedermayer's comments echoed Vice Governor Miroslav Singer who said earlier on Monday that future rate hikes may be slower than expected due to the currency's strength, news agency Dow Jones reported.

The crown traded at 27.506 to the euro at 10 a.m. EDT, up 4.5 percent since July's lows and off the all-time high of 27.385.