UPDATE 2-Czech CPI hits 7-mth high, rate hike seen on cards

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By Marek Petrus

Czech inflation quickened more than expected to hit a 7-month high in April, confirming a resurgence of price growth and leading the market to discount almost fully an interest rate rise later this month.

The consumer price index (CPI), a broad gauge of inflation targeted by the central bank (CNB), rose 0.7 percent in April from March to take the annual inflation rate to 2.5 percent from 1.9 percent a month earlier, official data showed on Thursday.

The year-on-year growth in shop prices overshot the market's consensus forecast of 2.2 percent as well as the CNB's estimate of 2.1-2.2 percent, as it returned to the CNB's tolerance range of one percentage point either side of a 3 percent rolling goal.

Money market rates and debt yields jumped 5 or more basis points to multi-month highs, increasing the likelihood of a rate increase in May to about 90 percent, market players said. The crown held largely flat at around 28.250 per euro .

"Without regard to the impact of excise taxes and changes in regulated prices on the figure, April inflation was relatively high and reinforced expectations of an early interest rate rise," said David Marek, chief economist at Patria.

"The question is: Will it come in May or June?" he added.

CNB policymakers left the main policy rate at 2.50 percent, the lowest level in the European Union, for a seventh straight month in April. But they said their inflation outlook implied a gradual rise in credit costs over the next 12-18 months.

Two members of the seven-strong CNB board voted for a 25 basis point rate rise at the April meeting, and analysts said the inflation data -- and a fall in unemployment also reported on Thursday -- gave the hawks a powerful argument.

LABOUR MARKET TIGHTENS

Inflation picked up broadly in April, with food and tobacco prices, fuel and natural gas costs, regulated rents, healthcare costs and clothing and footwear prices all rising.

The CNB's chief economic forecaster Tomas Holub said food price growth and the rise in regulated prices were both quicker than the central bank had predicted, and that core inflation also came in slightly higher than expected.

"However, (core inflation) is still hovering at low levels, which signals that inflationary pressures from the real economy remain modest," Holub said in a statement.

A firming of the crown to record highs at the end of 2006 kept a lid on price pressures in an economy expanding at a record 6.1 percent clip in both 2005 and 2006, but analysts said the latest data signalled the inflation picture was changing.

"It is no longer only administrative changes that drive CPI higher. It's starting to be clear that the disinflationary impact of the previous crown appreciation is diminishing," said Pavel Sobisek, economist at UniCredit in Prague.

A separate report showed the jobless rate fell to 6.8 percent at the end of April from 7.3 percent at end-March, below the market forecast of 6.9 percent, a sign that the labour market was tightening as the economy booms.

Total number of jobless fell to the lowest for the month of April in eight years, the Labour Ministry said, adding the number of registered vacancies grew to the highest on record.

"The economy is powering ahead, prices are rising and unemployment is falling -- and a rise in central bank interest rates should belong to this scenario," said Michal Brozka, analyst at Raiffeisenbank in Prague.

The CNB has paused since tightening policy by a cumulative 75 basis points between October 2005 and September 2006, but its current projection sees inflation inflation creeping up above its target to 3.5 percent by March 2008.

INSTANT VIEW ON APRIL INFLATION DATA........[ID:nL09317767]

FACTBOX ON CENTRAL BANK'S FORECASTS.........[ID:nL0428777]

Keywords: CZECH ECONOMY/INFLATION

[PRAGUE/Reuters/Finance.cz]