4 Min Read
* Cbank governor: higher chance policy will be looser than f'cast
* Crown drops 1 pct on Singer's remarks
* Board cannot avoid debate on next steps (Adds crown drop, analyst, details)
PRAGUE, Sept 18 (Reuters) - The Czech central bank has a range of tools beyond interest rates it could use to ease policy further in light of weak demand and growth, Governor Miroslav Singer said in a newspaper interview, driving the crown currency sharply lower.
Singer told daily Mlada fronta Dnes the economy suffered from poor confidence and the bank could act to improve it.
The Czech economy has suffered the longest recession of any EU country outside the euro zone, mostly on the back of weak domestic demand following government austerity measures.
The central bank cut its main interest rate to a record low 0.5 percent in June and Singer suggested the bank could loosen policy further, possibly including using unconventional tools.
"We are almost at the end with one tool, but we have a whole range of (tools)," he said.
"In a situation when you have the rate half a percent above zero, you cannot avoid debate about what could potentially be next."
The crown currency dropped 1 percent to 24.800, its lowest level since Sept. 5 in response to Singer's comments which came ahead of a Sept. 27 board meeting when the market expects a further 25 basis point interest rate cut. Czech bond yields also fell.
Singer said tools beyond rates could in theory include targeting the long end of the yield curve, buying or accepting a wider range of assets as collateral, or foreign exchange intervention. He said another option was the bank could make a public pledge to keep interest rates low for a long period.
However, he raised doubts about the impact of bond buying.
Analysts said the central bank would probably not widen collateral in a market with a surplus of liquidity, where commercial banks borrow next to nothing from the central bank.
"He wants to cut rates and has not come up with much else so far when it comes to other operations," said Petr Dufek, head of economic analysis at bank CSOB.
The bank's staff forecast, released on Aug. 2, implies a further drop in the policy rate, to as far as into negative territory by the middle of next year. S i nger said at the moment inflation pressures appeared to be lower than forecast and there was a higher chance that policy could be looser.
He said he had talked with the Danish central bank governor about how Denmark had created negative interest rates, but said Czech legislation would need to be changed so that other interest rates were not pegged to the bank's policy rate.
The governor said he did not know how willing the bank was to use the instruments available and a lot would depend on what his six colleagues on the board said.
"I think the CNB (central bank) has these tools to influence development in a positive direction. It is, however, a question if it is willing to use them, whether my colleagues read the situation like I do and are willing to react the same," he said.
Fellow board member Lubomir Lizal said this month that the bank was not planning to intervene to weaken the crown or buy financial assets, and Eva Zamrazilova said on Monday policy was already accommodative and cuts should be approached with caution.
Vice-governor Vladimir Tomsik said in August the bank was ready to use unconventional tools to meet its inflation target.
Czech consumer prices dipped by 0.1 percent in July and August on a monthly basis.
But Singer said he saw no signs of a deflationary spiral and did not understand why consumer sentiment was lower than it was at the start of the economic crisis given the Czech economy has "relatively healthy fundamentals". (Reporting by Jason Hovet and Robert Mueller; Editing by Susan Fenton)