By Jana Mlcochova
PRAGUE, April 24 (Reuters) - Czech policymakers pledged on Wednesday to support the contracting economy by sticking to ultra loose monetary policy for a long time while relaxing fiscal conditions, in a departure from the mantra of pursuing lower deficits.
The central European economy remains mired in recession, with demand for Czech exports from the euro zone waning and domestic demand hit by the centre-right government's spending cuts and tax hikes.
The central bank trimmed its key two-week repo rate to a record low 0.05 percent in November and has since been debating whether it should at some stage step into markets to weaken the crown against the euro.
Central bank governor Miroslav Singer said in an interview on news website www.patria.cz that near-zero rates could be in place for a long time to come as the economy languishes.
'The very latest development has brought rather negative data. At the moment its seems to me we are walking along (the bottom of the economic cycle),' he said.
'I expect our interest rates to remain at a technical zero for a very, very long time.'
Singer pointed out that while assessing the overall economic backdrop, one should not forget that the government was 'basically finished' with its fiscal consolidation.
Prime Minister Petr Necas said on Wednesday that his administration would soften its budget deficit targets for the next three years to aid growth, after undershooting its own target restriction in the past three years.
'We have stabilised the public sector finances, we have it under control, and now can focus on growth,' Necas told a news conference after saying the cabinet would keep the budget gap just under 3 percent and not try to cut it further.
Necas faces an election in a year's time that the centre-right cabinet currently looks set to lose, in part due to the unpopular austerity steps. The opposition Social Democrats have supported softer fiscal targets.
CENTRAL BANK SPLIT ON MORE EASING
The central bank's seven-member governing board has been split ahead of a policy meeting next Thursday over the urgency of using currency intervention to ease monetary policy amid falling inflation and expectations of a 0.3 percent economic contraction this year.
Critics have pointed to the risk of higher import prices further hitting already very weak demand.
But Singer said in the interview that the positive effects of a weaker exchange rate outweighed the adverse effects on demand, keeping the option of intervention on the table.
The crown hit a 17-month low of 25.995 on Tuesday. Its average rate in the second quarter has been 25.8 per euro, below the bank's forecast for 25.3.
Singer's vice governor, Vladimir Tomsik, said earlier on Wednesday that there was a risk inflation may fall further.
Asked whether this was a reason for a quick policy reaction, he said: 'I don't know. On one hand, the exchange rate is weaker than the last forecast, on the other hand, we have new anti-inflationary risks.'
'For me personally it is not acceptable to pretend that everything is fine when according to (the bank's staff) forecast inflation can be below our 2 percent target even in the long term,' Tomsik also said.
(Additional reporting by Jason Hovet and Jan Lopatka; Editing by Hugh Lawson) Keywords: CZECH CBANKER/TOMSIK
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