Updates throughout with governor's comments, market reaction
Bank votes 7-0 to leave rates on hold but discussed cut
Main rate has fallen by half since 2023
Policymakers have paused on changes since last year
Inflation reaches nine-year low, services prices still elevated
Governor says next move could be up or down, options open
By Jan Lopatka and Jason Hovet
PRAGUE, Feb 5 (Reuters) - The Czech National Bank (CNB) left interest rates unchanged on Thursday as expected, staying cautious but also debating scope for further small monetary policy easing with inflation at the lowest level in nine years.
The central bank has halved its main rate CZCBIR=ECI to 3.50% during an easing cycle that started in 2023, but has been on hold since last cutting rates in May, wary of price pressures from the services sector and rising wages.
Markets last year began turning attention to when the Czech bank might begin raising interest rates, betting it had reached an end to its policy easing.
But falling inflation - led by a drop in energy prices after a new populist government moved to cut people's power bills - and signals from some policymakers that a cut should still be up for debate have led markets to price chances of further rate easing.
Governor Ales Michl said after Thursday's decision - in which the bank's board voted 7-0 for unchanged rates - that policymakers would need to see slower momentum in core inflation to allow for lower rates.
"We considered today whether to lower interest rates or not," he said, but that did not mean a cut would be the next move. "We are keeping all options open for the next step being a lowering or an increase."
He added the discussion was over a slight fine-tuning of rates to move the short-end of the curve, but noted that the bank's new staff forecast also penned in an increase towards the end of this year.
The crown added to earlier gains after the decision and was up 0.5% versus the euro at 24.261 at 1458 GMT.
INFLATION LOWEST IN 9 YEARS, SERVICES PRICES ELEVATED
The new outlook forecast growth quickening to 2.9% in 2026, above a previous forecast of 2.4%. It also estimated inflation staying below the bank's 2% target this year.
Preliminary data on Thursday showed inflation slumped to 1.6% in January from 2.1% in December. Services price inflation, though, was still elevated at 4.7%.
The bulk of the drop was due to the government moving charges for renewable energy support from consumers to the state budget, which cut energy bills.
While the bank does not react directly to regulatory changes, it will follow if it lowers inflation expectations or seeps into other price segments.
BALANCED RISKS TO FULFILLING INFLATION TARGET
Vice-Governor Jan Frait told Reuters last month that the bank could discuss a slight monetary easing due to external factors that may lead large central banks to cut rates.
The Czech central bank said on Thursday that, besides wages and services prices, it was still watching inflationary risks from growth in lending in the housing sector and from fiscal policy, with the new government planning a higher 2026 budget deficit.
Downside inflation risks included weak economic performance in some euro zone partners, a strong crown exchange rate, and a possible correction of global asset prices.
(Reporting by Jan Lopatka and Jason Hovet; Editing by Kirsten Donovan and Sharon Singleton)
((jason.hovet@thomsonreuters.com;))