By Marek Petrus (Reuters, 5.3.2002)

CZECH CBANKER FRAIT WARNS AGAINST STRONG CROWN.

PRAGUE, March 5 (Reuters) - Czech central bank (CNB) board member Jan Frait said on Tuesday that a further appreciation of the crown against the euro could harm the Czech economy and the CNB could intervene at any time to weaken the currency.

The crown, boosted by market expectations of strong foreign currency inflows from selloffs and investments, closed at an all-time high of 31.48/51 to the euro after trading between 31.47/50 and 31.60/63 on Tuesday.

The record strength of the Czech currency has prompted rate cuts and direct market interventions by the central bank - where it buys euros for crowns to flood the market with the local currency - in recent months.

Asked if the crown's firming to new record highs versus the euro over the past few days could trigger central bank action, Frait told Reuters in an interview:

"The previous views of the central bank remain valid. In any case, we would consider a further firming (of the crown) from current levels as inadequate... and harmful."

At 1445 GMT the crown was trading at 31.54/56.

The CNB has been unhappy with the crown's relentless firming because its feels the rise has been much faster than the economy can sustain. It is especially unwelcome at a time when Czech exporters face sluggish demand in key western European markets.

Frait, who is in charge of financial management and currency circulation at the CNB, said that direct forex market intervention was a "discretionary" policy tool that the CNB could use whenever necessary, even outside its scheduled monthly policy meetings.

"Interventions cannot be considered in the same systematic manner that interest rates are," he said, adding the central bank has little chance to turn market sentiment abruptly around through interventions.

The central bank board meets every Thursday with the final meeting each month dedicated to monetary policy issues. It is the second time in a month that a CNB official has used strong language to warn of the consequences of the rising crown.

With regard to inflation, Frait, considered somewhat of a dove on monetary policy, said he felt the risks to the CNB's inflation outlook were well balanced and that current interest rate levels are adequate.

The central bank kept interest rates on hold at its monthly monetary policy meeting on Thursday. The key two-week repo rate stands at an all-time low of 4.25 percent after two 25 basis point cuts in January.

"I think interest rates are currently adequately set. I cannot say anything else but the risks (to inflation and interest-rate outlook) are symmetric," Frait said.

(C) Reuters Limited 2002.