UPDATE 4-Czech central bank catches market offguard with launch of crown sales

Thu Nov 7, 2013 1:07pm EST

* First interventions in over a decade

* Central bank governor says bank in it for the long term

* Crown falls 4.7 percent as central bank steps in

* HIGHLIGHTS: ; TABLE:

By Jan Lopatka and Jason Hovet

PRAGUE, Nov 7 (Reuters) - The Czech central bank took traders by surprise on Thursday with the launch of crown sales on the open market for the first time in over a decade, to weaken the currency and help stem a slowdown in inflation.

The bank's decision and subsequent action on the market, confirmed by dealers and then later by the central bank, knocked the crown down as much as 4.8 percent to a low of 27.000 to the euro, the weakest level since June 2009.

The crown's drop was its biggest intraday loss versus the euro on record.

Weakening the currency has long been seen as the remaining option for the bank to stimulate the economy after it cut interest rates almost to zero one year ago, but most analysts had expected the bank to stay on the sidelines as growth revives.

The central bank believes the weaker crown will add about one percentage point to inflation, which would otherwise fall to zero early next year, according to the bank's new forecast, which tilted the board towards taking the extraordinary step.

The decision is a victory for Governor Miroslav Singer who has argued for months for using the crown as the next tool to ease monetary policy but until Thursday was unable to convince a majority on the seven-member board to take action.

Singer told a news conference the bank had unlimited means to intervene against its own currency and would not end the campaign until it was very confident it would not have to start intervening again.

"It is absolutely clear to us that we are in for the long term," Singer said. "The question is not whether we stop (intervening) in 2014, it is rather a question if it will be enough."

The central bank said it would intervene "so that the exchange rate of the crown against the euro is close to 27 crowns."

A weaker exchange rate should raise prices and also revenue for exporters, a big part of the $188 billion Czech economy.

Board members who have been opposed to interventions argued that they could undercut people's spending power.

The bank did not reveal the vote count for the decision.

Singer made clear interventions would end only once significant inflation pressures emerge, greater than the bank normally needs to change interest rates. An exit may be combined with a rate hike, he said.

"At the moment we do this, we will be very, very, very sure that we do not have to return either to zero (on rates) or to the intervention regime. We will wait for an accumulation of very significant inflationary pressures," Singer said.

He confirmed the bank was in the market after dealers said they saw the central bank selling crowns in the first intervention since 2002.

"I think they did something about half a billion," one dealer said early in the afternoon. By 1655 GMT, the crown was bid at 26.971 per euro.

INFLATION OUTLOOK

The bank (CNB) will release intervention volumes in its regular monthly reports on foreign reserves and activities in the market. Foreign reserves stood at 34.6 billion euros last month.

Vojtech Benda, chief economist at BH Securities, said the bank could be more successful than last time it intervened to halt a rise in the currency in 2002.

"Firming pressures on the crown weakened in the past two years, whether it is foreign investments or stabilising trade balance. The CNB can achieve a large impact on the exchange rate using relatively smaller purchases of euros," he said.

While the economy is now recovering from a record-long recession, inflation has remained subdued and some analysts see falls in prices at the beginning of next year as tax hikes from the beginning of this year are factored out.

Inflation slowed to 1.0 percent in September, below the bank's 2 percent target. In an updated macroeconomic forecast on Thursday, the central bank said it saw inflation reaching 2.2 percent by the end of next year, in its scenario using interventions.

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