UPDATE 2-Czech inflation edges up but lags c.bank target

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By Marek Petrus

PRAGUE, April 10 (Reuters) - Czech inflation edged up in line with market expectations in March, but remained below the central bank's target, bolstering expectations of flat interest rates in the near term.

The consumer price index (CPI), a broad gauge of inflation targeted by the central bank (CNB), rose 0.3 percent in March from February to take the annual inflation rate to 1.9 percent, matching the median forecast of 14 analysts polled by Reuters.

The statistics bureau, which published the data on Tuesday, attributed the CPI rise to a tobacco price increase reflecting a past excise tax increase and a renewed rise in fuel prices after six consecutive months of declines.

Annual inflation quickened from 1.5 percent in February and a 1-1/2-year low of 1.3 percent in January, but was still below the CNB's tolerance range of one percentage point either side of a 3 percent goal.

A firming in the crown to record highs at the end of last year has kept a lid on price pressures in the booming economy, but most analysts predict a rise in interest rates by the summer as the crown has steadied at weaker levels.

The crown was slightly weaker on the day at 27.90 per euro by 1115 GMT, off 1.8 percent from all-time highs.

"While the headline figure was as expected, it is worth noting that out of the 12 major groups in the CPI basket, 10 saw their year-on-year rate heading north," said Pavel Sobisek, economist at UniCredit Markets & Investment Banking in Prague.

"This suggests that the spell of very low inflation, driven by crown appreciation, may be coming to an end. We expect CPI to exceed 2 percent in April or May, which is in line with our assumption that the CNB will resume hiking rates in July."

PRICE PRESSURES "MODEST"

CNB policymakers voted unanimously to leave the benchmark repo rate at 2.50 percent for a sixth consecutive month last month after agreeing that they lacked strong arguments for either a rise or a cut.

The CNB has paused since tightening policy by a cumulative 75 basis points between October 2005 and September 2006 to prevent record economic expansion of some 6 percent annually from fuelling inflationary pressures.

The CNB's top economic forecaster Tomas Holub said the March headline CPI figure lagged the CNB's projection by about 0.1 percentage points, narrowing the gap on the forecast from 0.3 percentage points a month earlier.

But Holub, who heads the CNB's monetary and statistics department, said the data showed CPI net of regulated items and volatile food and fuel prices kept hovering at "very low levels" and signalled price pressures in the economy "remained modest".

A separate report showed the unemployment rate fell to 7.3 percent of the workforce in March, undershooting the 7.4 percent consensus forecast and matching the lowest levels on record seen also in November 2006.

CNB policymakers warned in minutes from their meeting last month that labour shortages could fuel inflation as economic growth is drying up the pool of available workers and risks pushing salaries higher.

INSTANT VIEW ON MARCH CPI......................[ID:nL10472601] DETAILS OF MARCH JOBLESS DATA..................[ID:nPRA001240] TEXT OF MARCH CNB MEETING MINUTES..............[ID:nL06422019]