RPT-Czech c.bank gov's vote seals 25 bps rate increase

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By Marek Petrus

Central bank Governor Zdenek Tuma cast the decisive vote to raise Czech interest rates for the first time in 8 months on Thursday, amid buoyant consumption and resurgent inflation in the European Union member's economy.

The main repo rate rose by 25 basis points to 2.75 percent, as the CNB resumed 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.

For the first time in nearly 6 years, the board -- missing one of 7 members -- was evenly split in an interest rate vote.

Two members voted with Tuma for a 25 basis point rate hike, while the remaining three members wanted to keep policy on hold. The way the governor -- or the highest ranking member in his absence -- casts his ballot is decisive in case of a tie under CNB rules.

"There are various pros and cons when considering the setting of policy rates. However, in the end, the prevailing opinion was that the risks are slightly pro-inflationary," Tuma told a news conference.

Dovish-leaning Vladimir Tomsik was absent at Thursday's meeting, which had led markets to boost the chances of a hike.

The benchmark Czech credit costs are now at their highest point in more than four years, but still remain 100 basis points below the main euro zone rate.

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 an additional increase to 3.25 percent by December, according to Reuters data.

The crown was slightly firmer at 28.298 per euro after Tuma spoke from 28.360 before the rate announcement. Money market rates and debt yields were little changed, as investors had fully discounted a quarter-point rate rise beforehand.

RECORD CONSUMPTION

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 fell 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 suffered from the yawning rate gap versus the euro zone and has lost 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. "Record-strong household consumption and robust retail sales also called for a rise in interest rates."

Economists forecast May retail sales would rise 10 percent over a year ago, after 9.4 percent growth in January-March.

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]