RPT-INTERVIEW-Czech c.bank vice-gov says next hike may come soon

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By Marek Petrus

PRAGUE, June 18 (Reuters) - The Czech central bank (CNB) may consider raising interest rates again soon after the first increase in eight months in May to prevent inflation from flaring up, CNB Vice-Governor Miroslav Singer told Reuters.

"The assumption about a rise (in interest rates) is logical when the economy is running at full steam ahead," said Singer, whom markets see as a moderate but quite pragmatic policymaker.

"I think that when we balance the risks ... at the end of each of the coming months, then many people will probably say soon that this step is necessary, unless something significant changes the outlook," he said in an interview conducted on Friday.

The CNB board is due to review interest rates next on June 28, at a meeting which Singer said he would most likely be unable to attend because of a business trip.

The CNB's policy rate stands at 2.75 percent, its highest in more than four years, after the quarter percentage point rise in May.

Singer said that, based on his more than two years' experience on the CNB board, members preferred to act as soon as a majority backing a decision formed rather than to wait one or more months, if only to avoid surprising markets with an unexpected move.

He said that inflation risks had grown after the crown fell to 14-month lows versus the euro and consumers helped to propel the economy in January-March to an eighth consecutive quarter of annual growth at more than 6 percent.

"(A) quarter of a percentage point is no drama. It is certainly better to do the quarter point step than wait until the situation develops into a vote about half a percentage point," Singer said of his approach to future decisions on policy.

WATCHING ECB, BOE, FED

Czech rates are the lowest in the European Union and third lowest among developed economies after Japan and Switzerland. This has led investors to sell the crown for higher-yielding assets with the goal of capturing the interest rate spread.

Singer said rising global interest rates were forcing the CNB to follow suit, as a further widening of the deeply negative rate spread could undermine the crown and spur inflation in the Czech Republic's small and open economy.

The European Central Bank raised its main rate this month to 4.0 percent, 1-1/4 percentage points above the CNB's policy rate, while the U.S. Federal Reserve's rate is 2-1/2 percentage points higher than the Czech level.

"Everybody is talking about inflation risks, by which they are saying that interest rates in developed economies will go higher, even though, for instance in the euro zone, one can hardly see a substantial increase in inflation," Singer said.

"If this is the way that the ECB, (Bank of England Governor Mervyn) King, (Fed Chairman Ben) Bernanke read it, then this in itself is enough for you to know that you might need to hike, if for no other reason than to keep monetary conditions at least broadly neutral," he said.

Czech inflation eased to 2.4 percent in May from a seven-month high of 2.5 percent a month earlier, but was half a percentage point above the CNB's forecast from April which sees annual growth in consumer prices at 3.2-4.2 percent at end-2007.

Singer noted that inflation has picked up to within the tolerance range of one percentage point either side of the CNB's 3 percent goal, mainly due to higher cigarette taxes and a rise in electricity costs and other government-regulated items.

He said he could find only limited traces of inflationary pressures in the data so far. However, risks were building up.

He suggested companies may be coming under pressure to raise wages to retain or hire workers to keep up pace with buoyant demand both at home and in key west European export markets. This could add further fuel to inflation.

Another major source of concern for Singer was the fastest rise in industrial producer prices (PPI) in two years posted in May, which threatens to filter into higher consumer prices.

Keywords: CZECH CENTRALBANKER/