UPDATE 2-Czech Q4 expansion ebbs, more slowdown likely

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By Marek Petrus

PRAGUE, March 9 (Reuters) - Czech economic growth slowed but still beat market expectations in the fourth quarter, re-inforcing perceptions that the country's maturing expansion will bring higher interest rates later this year.

Gross domestic product (GDP), a broad gauge of the country's output, extended a moderate slowdown from a peak in late 2005 to advance at a 5.8 percent annual clip in the final quarter of last year, data showed on Friday.

Full-year growth reached 6.1 percent, the same as in 2005. The rate was double the 2.9 percent growth in the European Union last year, helping Czechs to further narrow the wealth gap with their richer west European neighbours.

The fourth-quarter figure outpaced a 5.2 percent expansion predicted by analysts polled by Reuters but both the crown currency and the bond market shrugged off the figures.

"The number is very good. Growth will probably continue, even though I think it will stabilise at around 5 percent rather than staying around 6 percent," said Miroslav Plojhar, chief economist at Citibank in Prague.

Fourth-quarter household demand growth accelerated to 5.4 percent, and fixed capital formation, which shows investment activity, jumped by 7.6 percent. Weaker exports performance dented the GDP growth figure.

Despite the demand revival, inflation has remained low in part thanks to a strong crown currency and the central bank (CNB) has held interest rates at 2.5 percent, the lowest in the EU and a record 125 basis points below the euro zone equivalent.

The CNB has paused since tightening policy by a total of 75 basis points between October 2005 and September 2006 to prevent robust growth from fuelling inflation.

The CNB said fourth-quarter growth was 0.1 percentage point faster than it had forecast.

"The continued acceleration of household consumption ... exceeded the CNB's expectation," Tomas Holub, head of the CNB's monetary division, said in a statement.

But he added this as well as other deviations of growth structure from the bank's forecast were rather insignificant.

CONVERGENCE IN 2017?

Rebounding household expenditure, a consumer credit boom and the prospect of sustained economic growth at around the 5 percent trend rate have led investors to look for a further, albeit moderate, tightening sometime in the second half of 2007.

"The fast growth in household consumption obviously smells of inflation, but it will not fuel inflation in itself. However, if the crown weakened, it would pose an inflation risk. This brings pressure on a rise in interest rates," said Plojhar.

The full-year growth put the Czechs ahead of fellow ex- communist central Europeans Poland and Hungary, but behind the regional star Slovakia whose white-hot economy expanded by 8.3 percent, one of the fastest rates in the EU.

Analyst Ales Michl of Raiffeisenbank said the Czech economy, the most advanced among the four regional economies converging towards the richer EU core, was at 79 percent of the average of the 27-member EU as measured by GDP per capita.

"With GDP per capita rising by at least 3.5 percent a year, we will reach the EU average by 2017," he said.

"We are about 0.5 percentage points above potential. I would expect the central bank to gradually raise interest rates towards 3 percent at the end of the year," he added.

The crown was flat at 28.130 per euro by 1220 GMT.

(Additional reporting by Jan Lopatka)

Keywords: CZECH GDP/