By Jan Lopatka (Reuters, 15.4.2002)

CZECH C.BANKER SAYS RATE MOVE NOT CROWN TOOL.

PRAGUE, April 15 (Reuters) - Czech National Bank (CNB) board member Pavel Racocha said on Monday the central bank does not consider an interest rate cut as a proper tool in its fight against the rising crown currency.

Racocha, considered neutral on monetary policy, told Reuters in an exclusive interview that interest rates should reflect inflation forecasts and that the impact of a rate move would be seen only with a delay of two to four quarters.

"We have to manage the interest rate setting policy according to our inflation forecasts for the (first) half of next year," he said referring to expectations that the current benign inflation environment will change later this year.

Several times in recent months the central has complained that the rise of the crown, on the back of expected strong investment flows and EU convergence, poses a threat to the economy as it far outpaces productivity gains.

Last week speculation grew that the central bank may cut rates in a bid to help stem the rise of the crown, which is up more than 15 percent against the euro in the past year and was trading at near record levels on Monday around 30.04/07.

"I can't imagine us reacting on any short-term volatility (of the exchange rate)," he added.

The key two-week repo rate now stands at an historic low of 4.25 percent with inflation at 3.7 percent in March. The bank has said it sees consumer prices by 2.5 to 3.8 percent at the end of this year.

Racocha added that if sentiment turns, the crown could weaken suddenly as the market was full of speculative players - a new development. He said that the impact of such a turnaround on the economy is the central bank's main worry.

"The current exchange rate is significantly anti-inflationary but I'm not convinced we could not see a drop in the crown," he said.

(C) Reuters Limited 2002.