By Jana Mlcochova and Robert Mueller
PRAGUE, July 21 (Reuters) - The room to debate a further lowering of Czech interest rates has grown as the overall economic picture is dominated by anti-inflationary risks, Czech central bank Vice-Governor Miroslav Singer said on Tuesday.
The Czech central bank cut interest rates to a record low of 1.5 percent in May as inflation headed below its target and an economic crisis hit the export-reliant economy.
Singer told Reuters in an interview a deeper than expected drop in the European economy would likely prompt the Czech bank to revise its 2009 GDP outlook downward but it wouldn't change its views the economy should resume growth in 2010.
"The room for a debate whether to cut is surely slightly wider... it seems to me it will be slightly wider with the next situation report than before, by which I am not saying that I have made up my mind whether the cut would be good or not," Singer said.
Czech consumer prices, targeted by the bank, rose 1.2 percent year on year in June, slightly above the bank's forecast of 1.0 percent. But it was still below the bank's current target of 3 percent and 2010 target of 2 percent.
Singer said inflation data from Western Europe show a "surprise in an anti-inflationary direction" indicating Czech inflation could develop below expectations.
"Moderately it signals that inflation could be a bit lower than we expected... the situation changed a bit in an anti-inflationary direction but how dramatic it is, that I cannot tell now."
"The most dramatic uncertainty is... what households will do, whether they will save."
Household demand, one of the pro-inflationary factors that made the bank refrain from a rate cut in May, remained surprisingly strong, growing 3 percent in the first quarter year-on-year despite an overall gross domestic product drop of 3.4 percent.
The crown currency's exchange rate, a major factor in the highly-open economy, has firmed and this is acting as an anti-inflationary factor.
"The exchange rate develops broadly in line with the prognosis but it is certainly a little stronger than what most of us expected several months ago," he said.
The bank's latest forecast from May assumes the crown-euro rate at an average of 26.6 in 2009 and 25.9 in 2010, weaker than Tuesday's 25.851.
The crown added 3.65 percent from the start of the year, outperforming regional peers the zloty and the forint which lost 3.24 percent and 2.71 percent respectively.
NEW PROGNOSIS
Global economic downturn has put strain on Czech exports, the key driver of rapid growth in past years, and bleak May industrial output and foreign trade data raise concerns the contraction could be even deeper in the second quarter.
Singer said the bank may cut its forecast for this year's GDP when it releases a new quarterly prognosis on August 6, the day it will also vote on interest rates.
"The drop in the European economy seems even crueller than expected... and that of course will show in our revision of growth expectations," Singer said.
The bank's May forecast sees the economy shrinking by 2.4 percent this year and growing 1.4 percent in 2010. (Editing by Stephen Nisbet)