UPDATE 2-Czechs hold rates flat, mkt eyes clues on next rise

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By Marek Petrus

PRAGUE, June 28 (Reuters) - The Czech central bank (CNB) left interest rates unchanged on Thursday, taking a breather after a quarter of a percentage point rise in May to contain budding inflation pressures in the strong economy.

Policymakers held the two-week repo rate at 2.75 percent , the lowest level in the European Union, matching widespread market expectations that they will wait for updated inflation projections in a July before possibly tightening further.

The CNB called a news conference for 3:30 p.m. (1330 GMT) on the decision to keep the main rate at its highest level in more than four years, but still a record 125 basis points below the euro zone equivalent.

Investors are waiting to see if the CNB confirms market views that another rate rise is on the cards after the crown extended its losses so far this year to 4 percent, fanning inflation concerns.

"We expect hawkish rhetoric due to a weak crown and strong consumption growth," said David Navratil, CNB watcher at Ceska Sporitelna. "We expect a hike to come in July when the board will have an updated forecast."

Only five of the seven board members were at the meeting. Vice-Governor Miroslav Singer, a moderate now showing signs of hawkishness, and dovish member Robert Holman did not attend.

The incomplete board and the crown's slide to 15-month lows versus the euro this month had fuelled jitters in markets that a surprise increase to 3.0 percent might come at Thursday's meeting.

The crown was a touch weaker at 28.635 against the euro by 1010 GMT, having recovered some ground in the previous session. It has suffered from the yield discount which has reduced its allure to foreign investors.

Debt yields and money market rates showed scant reaction.

HIGHER RATES IN OFFING

Markets have been gearing up for higher interest rates in the coming months after consumers helped to propel the economy in early 2007 to an eighth consecutive quarter of annual growth at more than 6 percent.

Consumer 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.

Inflation eased to 2.4 percent in May from a seven-month high of 2.5 percent a month earlier. However, a CNB forecast in April saw annual price growth at 3.2-4.2 percent at end-2007.

Policymakers have said the weak crown, the firm economy and rising household spending, fed partly by a consumer credit boom, would require a further gradual rise in interest rates over the coming year and a half to keep inflation at bay.

"Should the crown resume its firming in the second half of the year, the central bank will pause for several months after the July rate increase," said Raiffeisenbank analyst Ales Michl.

"We will not be surprised if rates were to be 3.50 percent within 12 months."

Profiles of CNB board members: [ID:nL28883806]

Board members recent remarks on policy: [ID:nL28700042]

Keywords: CZECH CENTRALBANK/RATES