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 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 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.