Czech Feb CPI in line, seen keeping rates on hold

...cement investors' outlook for a delay in further policy tightening until at least the summer.

The consumer price index (CPI), a broad gauge of inflation targeted by the central bank (CNB), rose 0.3 percent month-on-month, taking the annual inflation rate to 1.5 percent in February from a near 2-year trough of 1.3 percent in January.

The figure left inflation below the 2 percent bottom of the tolerance band of the CNB's target, which has 3 percent as its mid-point.

Separately, data showed the jobless rate dipped to 7.7 percent of the workforce in February from January's 7.9 percent.

"There is no noticeable acceleration in demand-side inflationary pressures, which is good news for the CNB," said Radomir Jac, chief economist at PPF Asset Management.

"At the same time, the data seem to confirm the opinion that Czech inflation reached this year's minimum in January and we expect it to grow gradually in the months to come," he added, forecasting another interest rate increase in June or July.

The CNB has paused since tightening policy by a total of 75 basis points between October 2005 and September 2006 to prevent robust economic growth of about 6 percent annually from sparking a revival of inflation.

Its key policy rate has held at 2.50 percent, the lowest level in the European Union and 100 basis points below the euro zone equivalent.

A delay in another Czech rate hike means the already record discount versus higher benchmark euro zone rates will widen further to 125 basis points if the European Central Bank hikes its rates to 3.75 percent as markets widely expect on Thursday.

Chief analyst David Marek of Patria Finance said fourth-quarter gross domestic product (GDP) data due on Friday would be more important for the near-term Czech policy outlook than February inflation numbers.

Economists forecast GDP growth of 5.2 percent annually, extending a slowdown from a peak seen in late 2005.