RPT-Czech cbank holds rates, but signals hike

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By Marek Petrus

PRAGUE, April 26 (Reuters) - The Czech central bank (CNB) kept interest rates on hold for a seventh consecutive month on Thursday but gave markets the strongest signal to date it was ready to tighten policy soon to keep inflation at bay.

Four out of six policymakers attending the monthly meeting voted to hold the main two-week repo rate at 2.50 percent , the lowest level in the European Union and now a record 125 basis points below the euro zone equivalent.

The two dissenters voted for a 25 basis point rate rise. The seventh policy board member, Mojmir Hampl, was absent.

Last year's crown rise has helped keep inflation below the CNB's 3 percent target since the autumn of 2006, allowing the CNB to pause after tightening policy by a cumulative 75 basis points between October 2005 and September 2006.

But CNB Governor Zdenek Tuma said a gradual rise in interest rates over the next 18 months would be required to prevent headline inflation from exceeding the CNB's target tolerance band, but added he was unable to foresee the timing of a move.

"It seems to me that at least some members of the bank board, and I dare to say most of them, now have a prevailing opinion that it is becoming more likely that the next move in interest rates will be upwards," Tuma told a news conference.

Annual inflation quickened to 1.9 percent in March. The CNB raised its inflation forecast to 3.2-4.2 percent for December 2007 and predicted 2.7-4.1 percent price growth for December 2008, saying robust demand was fuelling inflation pressures.

But Tuma said inflation net of primary effects of expected tax rises -- the CNB's preferred gauge for setting monetary policy -- would hover in the lower half of the CNB's tolerance range of one percentage point either side of the 3 percent goal.

The Czech crown firmed slightly on the session, trading at 28.120 to the euro after the rate decision from 28.140 just ahead of it. Short-dated money market rates and debt yields jumped about 5 basis points on Tuma's comments.

ECONOMY STRONGER THAN EXPECTED

The yawning yield gap versus the euro zone has helped the crown steady at levels about 2.5 percent below end-2006 record highs to the euro, which analysts said could allow the CNB to track an expected European Central Bank rate hike.

Tuma said the economy's 7-year-old expansion appeared to be sustaining a higher than expected growth pace after gaining 6.1 percent in both 2005 and 2006.

The CNB raised its 2007 gross domestic product (GDP) growth forecast to 4.9-6.5 percent from 4.4-6.2 percent at the previous quarterly update in January. For 2008, it saw 3.8-6.8 percent expansion, up from 3.1-6.5 percent envisaged in January.

Investors have been betting the CNB will resume policy tightening with a 25 basis point interest rate increase by July.

"Recent data from the Czech economy signal that the still very high pace of growth could gradually fuel demand-pull inflationary pressures," said Martin Lobotka, analyst at Ceska Sporitelna in Prague.

The strongest retail sales growth in 3-1/2 years, rising producer prices and employment, and a one-day strike over pay at the largest Czech company have all pointed to a risk that rising labour costs and household demand would spur inflation.

Click on [ID:nPRA001271] for Table detailing the CNB's forecasts

Click on [ID:nL26319843] for highights from the Governor's news conference