POLL-Czech rates seen likely to rise to 4-yr high in May

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The Czech central bank looks likely to decide narrowly in favour of raising the European Union's lowest interest rates to a more than 4-year high on May 31 to tame resurgent inflation, a Reuters poll showed.

The CNB's policy-making panel is widely expected to be split on whether a pick-up in inflation to a 7-month high of 2.5 percent in April and buoyant consumption require an imminent tightening of policy.

But 14 of the 21 CNB watchers predicted at least four out of the seven policymakers would vote for a 25 basis point increase in the 2.50 percent main policy rate next week, bringing it to the highest level since January 2003.

Six forecast a quarter-point rate rise by July and one saw it coming by August.

"We expect a rate hike at the end of this month, but it is going to be a close decision," said Istvan Zsoldos, central European economist at Goldman Sachs in London.

The economy has been booming, supported by an upturn in neighbouring EU economies and rapid expansion of credit to households to finance home building and consumer purchases.

Growth has looked to be sustaining a robust pace of 5-6 percent after expanding at a record 6.1 percent clip in both 2005 and 2006.

Two of the six rate setters present at the previous monthly meeting in April already voted for a quarter-point hike against four seeking to keep policy on hold for a seventh month running.

The two-week repo rate , the central bank's tool for draining extra liquidity from the open money market, has held flat following increases totalling 75 basis points between October 2005 and September 2006.

The pause in the CNB's hiking cycle has reflected a sharp rise in the crown currency to record highs in late 2006, which cut imported inflation in the very open economy and offset any price pressures stemming from domestic demand growth.

VERY CLOSE CALL

The crown's 3 percent slide from record peaks, a rebound in inflation to near the CNB's 3 percent target, falling unemployment and record growth in retail sales have all led investors to gear up for an imminent rate rise.

But analysts said conflicting comments on the rate outlook made by as many as five policymakers since the April monthly meeting suggested a deep split among hawks and doves on the board, making this month's decision an exceptionally tough call.

Economists said it was unclear how many of the CNB's less hawkish members would prefer to wait for hard data on first-quarter economic growth and wages, due out in June, to see evidence of price pressures building up in the buoyant economy.

"Given the relatively weak crown, we would rate the probability of the next rate increase coming as early as May at 40 percent, against 60 percent for June," said Ales Michl at Raiffeisenbank in Prague.

Economists and markets alike are looking for additional tightening in coming months on top of the next rise.

The median forecast for the repo rate 12 months from now was 3.25 percent, up from 3.00 percent in a similar poll in April.

FOR DETAILED FORECASTS, DOUBLE-CLICK ON [ID:L23322036]

Keywords: CZECH ECONOMY/RATES

[PRAGUE/Reuters/Finance.cz]