UPDATE 1-Czech economy keeps fast growth, consumption leads

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By Jan Lopatka

PRAGUE, June 8 (Reuters) - The Czech economy expanded by 6.1 percent in the first quarter, confirming the central European country's growth was cooling slightly while rising inflationary pressures pointed to higher interest rates.

The Czech Statistical Bureau (CSU) said the growth, even with a revised fourth quarter figure of 6.1 percent, was driven mainly by household demand.

The data were exactly in line with expectations in a Reuters poll of analysts, and slower than full-year 2006 expansion of 6.4 percent.

"On the supply side, the rising demand is being secured by growth in production and added value, mainly in the processing industry, construction and trade," the CSU said.

The Czech expansion lagged the boom in neighbouring Slovakia, which posted 9.0 percent growth in January-March, but matched 6.1 percent growth in northern neighbour Poland and outpaced Hungary, which reported 2.7 percent growth.

The Czech growth has been driven in recent years mainly by the car and electronics industries, which have helped swing the trade balance into surplus and given workers more money to spend.

Rising welfare handouts based on new laws approved ahead of mid-2006 elections also played their part in raising people's disposable incomes, analysts said.

A separate set of data showed inflation dipped to 2.4 percent in May from 2.5 percent in June, but was still up from 1.3 percent in January. It is expected to rise further.

Analysts said the trend towards higher price growth would require further tightening of monetary policy after a 25 basis point interest rate hike last month.

"Both the dynamics of GDP and its structure on the expenditure side are pointing to growing inflationary risks in Czech economy," said Radomir Jac, an analyst at PPF Asset Management.

"As such, they are sending a signal to the Czech central to normalise their interest rates further from the current low levels."

The crown currency was flat after the data at 28.46 to the euro .

Czech interest rates stand at 2.75 percent, 125 basis points below the main European Central Bank rate after the ECB hiked the cost of money on Wednesday.

The discount has knocked down the Czech currency in the past months.

"The crown rate is so weak that it cannot be satisfactory for the central bank," said Raiffeisenbank analyst Ales Michl.

"The probability has risen that a further interest rate increase of a quarter a percentage point will come already in July," he said.

The central bank said in the minutes of its May 31 meeting released on Friday that interest rates will rise towards policy-neutral levels in the future because downside risks to inflation observed in the past have diminished.

Economists have said policy-neutral rate levels in the Czech economy have been below but close to 4 percent, although they could fall somewhat to reflect a cut in the central bank's inflation target to 2 percent as of 2010 from the current 3 percent.

Separate data showed unemployment fell to 6.4 percent in May, a new low since 2004 when current methodology was introduced, from 6.8 percent in April.