(Adds c.bank comments, details, updates crown)
By Petra Vodstrcilova
PRAGUE, Dec 17 (Reuters) - The Czech central bank cut interest rates by half a percentage point on Wednesday and painted a dark picture of economic development that promises to more policy easing on the horizon.
The bank's move takes the main repo rate, used for sterilising surplus liquidity, to 2.25 percent, its lowest level since July 2006 and below the euro zone's 2.5 percent.
Two out of six board members called for 75 and 100 basis point reduction as the global financial crisis strangles growth in the export-reliant central European EU member more than expected.
The Czechs' Wednesday move follows easing in its European Union newcomer peers, ranging from a quarter point cut in Poland last month to Hungary's twin 50-basis-point cuts since a 3 percentage point hike in October.
Vice-Governor Miroslav Singer said following the decision that downside risks pointed to further cuts in borrowing costs, as the central European economy battles with waning export demand from the struggling euro zone.
He said the economy was falling behind the bank's forecast made in November which saw growth at 2.9 percent next year and inflation falling sharply, but was even deviating from a pessimistic scenario which saw bigger decline in growth and inflation.
"The economic development significantly deviates from the basic scenario but also the alternative, in the anti-inflationary direction," he said. "Everything is deep below the forecast."
Asked directly about the next rate move, Singer said:
"The fact that we say that risks of the development are ant-inflationary probably gives some answer.
The market had expected the 50 basis point move, although some economists said the bank could have cut by 75 basis points after the U.S. Fed chopped borrowing costs to near zero on Tuesday.
The Czech bank is likely to cut below the 2 percent mark, analysts said.
"It is difficult to assess how low interest rates could be set due to fair amount of uncertainty, but we expect to see the key two-week repo rate closer to 1 percent than 2 percent," 4CAST analysts said in a note to investors.
"This will depend on how severe the economy suffers on the back of global crisis, but at this stage the outlook does look gloomy."
The Czech crown
Inflation fell sharply in October and was more than a percentage point below the bank's expectations, while manufacturing in the industry-heavy country shrank as demand from the main Czech export market, the euro zone, collapsed.
A 75 basis point reduction by the ECB earlier this month meant Czech rates rose above those in the euro zone for the first time in almost four years. (For HIGHLIGHTS from news conference, click on [ID:nLH86292])
(Additional reporting by Jana Mlcochova)