Czech central bank keeps rates unchanged for second time in row

(Updates throughout with Governor comments)

By Robert Muller and Jan Lopatka

PRAGUE, Sept 29 (Reuters) - The Czech National Bank (CNB) kept interest rates unchanged on Thursday as the first slowdown in inflation in over a year left it room to maintain policy stability amid a slowing economy and building energy crisis.

The central bank reiterated interest rates would stay high for some time after a tightening cycle in the past year brought the bank's two-week repo rate CZCBIR=ECI to 7.00%, the highest since 1999 and up a combined 675 basis points since June 2021.

The bank also vowed to continue market interventions to prevent excessive currency swings as markets come under pressure from a soaring U.S. dollar and recession risks in Europe.

Economies are facing bleak prospects amid high inflation that has surged to decade-old highs since last year and an energy crisis after Russia's invasion of Ukraine and Moscow's cuts of gas supplies to Europe.

But after a year of sharp policy tightening already, central Europe's rate setters are trying to end the cycle even as global banks like the U.S. Federal Reserves and European Central Bank ratchet up their own rate hikes.

CNB Governor Ales Michl said on Thursday that rate hikes were still not fully off the table at the next policy meeting, on Nov. 3. Rate cuts were never debated during the meeting, which ended with a 5-2 vote for stable rates, he said.

"The main point against raising rates is that the current level has been taming the volume of money in circulation, so it slows the volume of loans, both (corporate loans) or mortgages," he said, adding arguments for higher rates were to prevent inflation expectations from rising.

"That's why we say interest rates either stable or higher, that is what we debated today," he said.

Michl said "really high" wage demands and a further state budget deficit increase - which would bring demand-led inflation pressures - would be reasons to consider a further rate hike.

But calls for rate stability got a boost this month from August inflation data showing the first decline in the headline rate in over a year, to 17.2%. Czech wage growth has also lagged sharp rises seen around central Europe and pay fell by a real 10% in the second quarter.

The crown EURCZK= has stayed relatively stable since May, when the central bank first begin using its massive foreign reserves to intervene in markets.

Reserves dropped to 142.3 billion euros in August, equal to about 57% of gross domestic product in crown terms and down from 160.4 billion euros at the end of April.

Michl said there was no level the bank did not want reserves to fall under. "The CNB will continue to prevent excessive fluctuations of the crown," he said.

The currency was up almost 0.3% on the day at 24.58 to the euro, while central European peers got hammered - with the Hungarian forint hitting a new all-time low - due to market worries after leaks in Nord Stream pipelines between Russia and Europe were found.
Reporting by Robert Muller and Jan Lopatka Editing by Jason Hovet, Catherine Evans, William Maclean

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