Tim Gosling in Prague -

As widely expected, the Czech National Bank slashed another 25 basis points from its benchmark rates on September 27, setting yet another record low of 0.25%. With rates now almost down to the bone, the big question is where next should the economy refuse to respond to the latest shot in the arm.

With the economy in reverse for three quarters in a row now, and industrial and confidence data in July-September hardly inspiring, the last easing in July clearly needed reinforcement, as consensus insisted ahead of the meeting. Reflecting that, at five against two the voting on the central bank board was clearer than it has been for most of the year.

Indeed, at the consequent press conference, Governor Miroslav Singer stated that the CNB sees the risks to its latest forecasts on the anti-inflationary side, and include a stronger currency, further weakening of economic activity and lower real wage growth.

Kommercni banka analysts say that if the situation abroad or in the Czech economy worsens, the bank board will have to look for unconventional tools to loosen monetary conditions further. Singer indicated that weakening the crown is the most likely first option. However, so far the board has not agreed when this channel should be used, while no board member apparently suggests forex interventions should start immediately. Still, the currency rapidly shed over 0.8% against the euro following his comments.

KB falls into line with Singer, saying: "We see measures aimed at weakening the Czech crown as being the most effective for the small and open Czech economy. Unconventional measures such as encouraging banks to lend more will not be effective in our view as the problem is on the demand side; demand for loans is weak as consumers and companies are cautious. Moreover, the banking sector is liquid, healthy and profitable."

Erste Bank also agrees that the crown is the first port of call, but is less convinced the CNB actually intends to play a major role in forex markets, simply because it appears more an act of desperation than targeted strategy. "We agree that FX interventions indeed are powerful (especially if sustained),"they write. "However, we tend to view this as more of a verbal intervention than actual announcement that they're ready to do it - similar to summer 2008, when the crown dipped below 23 against the euro, and February 2009, when it was attacking 29. This time, though, it's not that the crown is excessively strong or weak - it's more for the want of any other tool to ease the conditions in the economy."

In addition, they point out that the CNB is inherently conservative, and historically opposed to intervention, therefore "this would be a compete about-face," and that it does not currently face deflationary concern. In addition, with options rapidly running out, they suggest the CNB is likely to want to keep its powder dry in case of an external shock such as one in 2008.

For similar reasons, KB analysts add that they doubt "the CNB will do quantitative easing (buying government bonds or other domestic assets aiming to lower some part of the yield curve)."

However, Governor Singer told bne at the start of this year that he was not "repulsed" by the rounds of quantitative easing that the US Federal Reserve and the Bank of England have undertaken, though stressed he was glad that the CNB hadn't had to do it. "It's a normal reaction of a central bank when the space to ease through interest rates is exhausted," Singer said in January. "I am happy we don't have to do it, but I don't find anything particularly repulsive or wrong with doing it."