July 3, 2020 / 12:56 PM / a month ago

UPDATE 1-Czech rate cut could be threat to financial stability, central bank governor says

(Adds comment on unconventional tools)

PRAGUE, July 3 (Reuters) - Cutting the main Czech interest rate from the current level of 0.25% could lower interest income and become a threat to the financial sector’s stability, central bank Governor Jiri Rusnok wrote in a co-authored blog post released on Friday.

“The stability of the financial sector is key for providing liquidity to the real economy,” Rusnok said in the article published on the bank’s website.

The central bank left interest rates unchanged in June after cutting the main two-week repo rate by 200 basis points since March.

Rusnok had said after the meeting on June 24 that the bank had “done (its) work” in monetary policy and financial stability by actions taken since March, with the onset of the coronavirus pandemic in Europe.

The bank forecasts a massive 8% contraction in the Czech economy this year before 4% growth in 2021.

Analysts had mostly expected the central bank to stay put on rates going forward, although some saw a chance of rates being cut to the technical zero level of 0.05% like the bank did in 2012.

Debate around whether the bank could launch unconventional tools has also started. Rusnok has said discussions remain hypothetical.

In the blog, he said the thinking was how to connect the financial sector to economic recovery “without leading to risks that will then cause problems and exacerbate the crisis.” (Reporting by Jason Hovet)

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