(Adds dropped word 'and' in paragraph 1)
PRAGUE, June 17 (Reuters) - The Czech financial sector is stable and could withstand a strong recession accompanied by deflation thanks to capital buffers, the central bank said on Tuesday in a regular financial stability report.
The main risks to the sector were a possible return to recession because of developments in trading partners as well as a deterioration in domestic demand, the central bank said.
"(Global) central banks and supervisory authorities are facing the task of avoiding a renewed decline in demand and a fall of economies to the deflation trap, and at the same time preventing excessive risk-taking on financial markets," the central bank (CNB) said.
"The CNB is actively preventing the risk of a drop in demand and deflation by using the exchange rate as a monetary policy instrument, which is contributing to the stability of the financial system."
The central bank launched interventions last November to weaken the crown currency and fight deflation risks as the economy recovers from a record-long recession that ended in 2013. (Reporting by Jason Hovet; Editing by Hugh Lawson)