UPDATE 1-Czech c.bankers eye rate rise, won't target assets

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The Czech central bank (CNB) is probably nearing a time when it will raise interest rates, but its policy primarily seeks to keep inflation in check and does not target asset prices, CNB policymakers said.

In a newspaper article published on Thursday, CNB Vice-Governor Miroslav Singer and board member Vladimir Tomsik warned against tightening monetary policy only to prevent instability in the financial sector.

"The time when the CNB will be raising interest rates is probably approaching today," they wrote in the daily Hospodarske Noviny.

"However, when doing so, it (the CNB) will primarily seek to meet the inflation target, and the possibility of a bubble bursting in an individual market will always be only one item among many other items of information which the CNB will take into consideration," the two bankers added.

The Czech policy rate has held at 2.50 percent, the lowest level in the European Union, following increases totalling 75 basis points between October 2005 and September 2006.

Markets raised bets on a further 25 basis point rise as soon as May 31 after inflation hit a 7-month high of 2.5 percent in April, compared with a 3 percent target, and the number of unemployed fell to the lowest for that month in eight years.

The low level of domestic credit costs, which are a record 125 basis point below the euro zone equivalents, have spurred a boom in mortgage lending as rising incomes made buying their own flat or house affordable for a growing number of Czechs.

Some economists have warned that the low interest rate level has fuelled bubbles in the housing market and called for an early, pre-emptive interest rate increase to sustain healthy economic growth and maintain central bank credibility.

But Singer and Tomsik spoke against such attempts.

"An effort to establish higher interest rates in an attempt to prevent possible problems in the area of financial stability would be counter-productive because it would probably lead to an excessive appreciation in the crown," the two bankers wrote.

"We are still convinced that 'low' policy rates of the CNB were in past years the only possible adequate reaction to very low inflationary pressures, firmly anchored low inflation expectations and a trend of nominal appreciation of the crown's exchange rate," they said.

A rapid firming of the crown, which has cut import prices and helped to tame inflation in the Czech economy, has caused the CNB to undershoot its target in the past few years.

Over the past few months, the crown has held in a relatively narrow range at around 28 per euro as low interest rates encourage investors to sell the domestic currency for higher-yielding assets elsewhere.

[PRAGUE/Reuters/Finance.cz]