UPDATE 2-Czech c.bank ups rates by 25 bps to tame inflation

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By Marek Petrus

The Czech central bank (CNB) raised interest rates for the first time in 8 months on Thursday, responding to buoyant consumption and resurgent inflation as markets expected.

Policymakers hiked the main repo rate by 25 basis points to 2.75 percent, resuming a tightening of policy after inflation picked up to within the tolerance range of one percentage point either side of the CNB's 3 percent goal.

Czechs rates are now at their highest in more than four years, but still remain 100 basis points below the main euro zone rate.

The crown ticked higher to 28.320 per euro by 1150 GMT from 28.360 just before the news. Money market rates and debt yields were little changed, as investors had fully discounted a quarter-point rate rise beforehand.

The CNB called a news conference for 3:30 p.m. (1330 GMT) to elaborate on the decision and say how the six policy board members who attended the meeting voted.

"What everyone wants to know is when to expect the next rate hike, whether in July or later," said Jan Vejmelek, head of economics and strategy research at Komercni Banka in Prague.

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

Forward-looking money market rates are pricing in another rate hike to 3.00 percent by August, and additional increase to 3.25 percent by December, according to Reuters data.

CLOSE VOTE?

The CNB's seven-member panel was seen as split over the need for an immediate tightening of policy, but markets had concluded that hawks would prevail due to the absence of dovish-leaning Vladimir Tomsik at Thursday's meeting.

With an even number of board members present, the way Governor Zdenek Tuma -- widely believed to be a moderate hawk -- casts his ballot would have been decisive in case of a tie.

"It's likely that voting was close ... However, the hawks have been pressing for a rate hike before inflation is clearly present in the data, and it seems that they won out in the end," said Lauren van Biljon, analyst at 4CAST consultancy in London.

The economy has been booming and looked to be sustaining 6 percent annual growth in early 2007, supported by an upturn in neighbouring EU economies and rapid expansion of credit to households to finance home building and consumer purchases.

Inflation has rebounded and hit a 7-month high of 2.5 percent in April. Wednesday's Reuters poll showed inflation was expected to have remained at 2.5 percent in May. [POLL/CZ]

The poll participants estimated the unemployment rate would fall to a new long-term low of 6.5 percent from 6.8 percent last month, a sign the strong economy was drying up the pool of available labour. Analysts and central bankers alike worry that this may boost wage demands.

The crown, whose strength last year helped keep a lid on budding price pressures, has slid more than 3 percent from all-time highs versus the euro reached in late December 2006.

"The exchange rate no longer dampens inflation as we have been used to," said Ales Michl, analyst at Raiffeseibank.

INSTANT VIEW ON THURSDAY'S DECISION..........[ID:nL31320495]

CNB BOARD MEMBERS RECENT REMARKS ON POLICY...[ID:nL31243192]

POLICYMAKERS' PROFILES........................[ID:L31231601]

ANALYSTS' INTEREST RATE FORECASTS..................[CNB/INT]

Keywords: CZECH ECONOMY/CENTRALBANK RATES

[PRAGUE/Reuters/Finance.cz]