UPDATE 1-Czechs to keep crown weak into 2015, happy with target

By Jan Lopatka and Robert Muller

PRAGUE, Dec 17 (Reuters) - The Czech central bank confirmed on Tuesday its intention to keep the crown currency weak until at least early 2015 to combat potential deflation and support growth, saying recent data showed the economy remains fragile.

The bank decided on Nov. 7 to sell crowns on the market for the first time in 11 years, having previously raised the prospect of intervention to loosen monetary policy further after cutting interest rates almost to zero.

On Tuesday, after its first policy meeting since then, the bank repeated that it would allow the currency to float on the weak side of its target level of near 27 crowns to the euro.

Recent data supported its decision, the central bank said.

The Czech economy contracted by 0.1 percent in the third quarter after growing for the first time in a year and a half between April and June. The bank also cited data from October suggesting a recovery in some industries but a continuing downturn in construction and retail sales.

Governor Miroslav Singer said the crown's target rate was well set at around 27 and the market was adjusting to the sales, which have added billions of euros to the bank's reserves.

'The exchange rate is still settling after the announcement of interventions,' Singer told a news conference. 'The Christmas period is coming into it, when imports can be rising to satisfy pre-Christmas demand.' Importers buying dollars or euros to pay foreign suppliers can weaken the local currency.

The crown has dropped more than 6 percent since the bank started selling the currency. It traded at 27.685 to the euro on Tuesday, down half a percent on the day and 2.5 percent weaker than its target rate.

On Tuesday, the bank also kept the two-week repo rate at a record low of 0.05 percent.

Central bank data shows it issued and sold more than 200 billion crowns ($9.98 billion) in the first two weeks of interventions. Since then, yields on Czech debt of up to one year's maturity have dipped into negative territory as the market absorbs the newly minted currency.

Singer said the negative yields were among factors suggesting 'the market may have been to a certain extent overbought into the crown'.

ECONOMIC BOOST

The bank says the weaker crown should boost inflation by raising import prices and also persuade shoppers who have been putting off large purchases anticipating lower prices to buy.

Sluggish consumer demand has hampered growth in the Czech economy after its escape from a record recession.

Annual inflation dropped below 1 percent in October, outside the central bank's target range of 2 percent plus or minus 1 percentage point, raising fears of deflation, but picked up to 1.1 percent last month. Inflation is set to drop in early 2014, however, as tax rises are factored out and power bills fall.

The bank expects that weakening the crown will help return inflation to its 2 percent target by the end of next year, when it also predicts economic growth of 2.1 percent.

'The weakening of the crown certainly supports economic growth, which will speed up next year,' Singer said. 'Overall, the weakening of the crown should bring higher GDP cumulatively somewhere on the level of 60 to 70 billion crowns.'

Analysts also expect the weaker crown to enhance growth next year by helping exporters, the backbone of the economy, but warn rising prices in shops will hurt consumer demand. Politicians, businesses and the public have made similar criticisms.

The Czech Republic's $190 billion economy depends on foreign trade, and a statistics office report on Monday showed three-quarters of imports go into the manufacturing chain. ($1 = 20.0323 Czech crowns)

(Writing by Jason Hovet; Editing by Catherine Evans) Keywords: CZECH RATES/

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