Czech cbank warns against too much growth optimism

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PRAGUE, June 12 (Reuters) - Excessive optimism about future growth in the Czech economy may undermine financial stability if workers demand more pay and consumers take on more debt, the central bank (CNB) warned on Tuesday.

In its annual financial stability review, the CNB concluded that the current trends in the financial sector and the economy at large -- both dominated by foreign investors -- boded well for maintaining financial stability further down the road.

However, it warned that economic growth of 6.4-6.5 percent annually in the past two years and expectations of sustained robust growth this year and next could make consumers and businesses too complacent when borrowing and investing.

"The Czech economy is currently facing a risk of excessively optimistic expectations regarding its future development," the CNB said.

The Czech Republic has the lowest interest rates in the European Union, which it joined in 2004, in spite of a quarter of a percentage point interest rate increase last month.

Markets expect the CNB to raise benchmark credit costs by another quarter-point to a near 5-year high of 3.0 percent as early as July, as inflation rears its head and household spending rises at its fastest rate in more than 3 years.

The CNB report said the low cost of money, together with loose fiscal policy and asset price rises, could boost wage demands and give a further boost to consumption and debt expansion.

Buoyant growth in household credit continued in 2006, with lending expanding by nearly one-third. Loans to households equalled almost 20 percent of gross domestic product (GDP), well below the 60 percent average in the 15 old EU member countries.

"The growth in household debt poses no significant risk to the financial sector, and Czech households cannot be regarded as overleveraged," the CNB said in a summary of the 100-page report.

However, it said a comparison of property prices and income pointed at a possible "emerging bubble" in housing prices, which last year rose almost 25 percent in the capital, Prague.

The CNB also said renewed pressure for "excessive appreciation" in the crown cannot be ruled out, as yield-hungry global investors keep piling into riskier emerging markets assets.

"This is a risk factor from the point of view of domestic economic activity and the external balance," the report said.

The crown traded at 28.477 per euro at 0650 GMT, about 3 percent below lifetime peaks reached late last year when the currency's firming led the CNB to hold off on policy tightening.

HIGHLIGHTS OF THE REPORT........................[ID:nL12446528]