RPT-POLL-Czech rates seen on hold until third quarter

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By Mirka Krufova and Jan Lopatka

PRAGUE (Reuters) - The Czech central bank will keep interest rates flat for several months before beginning to tighten policy, a Reuters poll showed on Wednesday.

Low inflation has shifted expectations of a tightening months ahead, but the market still believes the next move will be upwards despite comments in the past days by two central bankers that both a hike and a cut were possible.

All 18 analysts polled by Reuters said the bank would leave the main two-week repo rate at 2.5 percent --- the lowest in the European Union -- at monthly policy meeting on March 29.

One said he expected a 25 basis point tightening could come already in the second quarter, while 16 said it would come in the third quarter at the earliest and one saw it only in October.

"The forecast has not changed from the previous month. What has changed is the fact that continuing appreciation of the crown is raising the probability of a rate cut in the future," said Raffaella Tenconi, a central Europe economist at Dresdner Kleinwort.

"However, we maintain the view that that probability remains low and in any case the (board) will avoid rushing into a loosening unless there is a sustained evidence that the inflation outlook has seriously improved," she said.

The crown fell from all-time highs at the beginning of the year but has recovered this week on the back of a sharp rise in the Slovak crown, following the revaluation of its central parity to the euro.

The Czech unit was trading at 27.915 on Wednesday afternoon, 1.5 percent weaker since the record levels at beginning of the year.

The central bank tightened policy by 75 basis points between October 2005 and September last year but expectations of further rises have been constantly pushed back since, mainly due to the currency strength which depresses import prices.

Inflation has edged up to 1.5 percent in February from January's low at 1.3 percent, but still remains far below the midpoint of the central bank's target, which is 3 percent.

Czech interest rates are already the lowest in the EU despite fast economic growth. The main policy rate stands 125 basis points below the European Central Bank's rate.

That has made the crown a funding currency for taking positions elsewhere in the region, knocking the Czech unit off, but the low-yield environment has also protected it from bouts of emerging market selling.

A Reuters poll last week saw the interest rate discount keeping the crown on a softer footing in the coming months before it returns to its long-term upward trend.

The March 16 poll, ahead of the Slovak revaluation, saw the crown at 28.13 to the euro a month ahead and at 27.25 a year from now. (For individual poll answers, click on [ID:nL21449308])