RPT-Czechs hold rates flat, signal rate hike in offing

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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.

Governor Zdenek Tuma said the CNB had no reason to "panic" and hike at every monthly meeting despite a weaker crown currency and robust economic growth. However, he re-affirmed market views that credit costs would head higher in the coming months.

Policymakers held the main two-week rate at 2.75 percent , its highest point in more than four years, but still the lowest level in the European Union and a record 125 basis points below the euro zone equivalent.

With two of seven policy board members absent from the meeting, the CNB matched widespread market expectations that a further credit tightening was unlikely before a quarterly update of inflation projections in July.

Four board members voted for no rate change. One dissenter demanded a 25 basis point hike. 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 rise to 3.0 percent might come at Thursday's meeting.

"We do not have a feeling we are falling behind the curve. The situation is not such that we would have a feeling we need to hike meeting by meeting," Tuma told a news conference.

"There was a little bit of worry that (a rate hike now) could be viewed as a panicky reaction because the exchange rate happened to weaken slightly just now."

In contrast, the central bank of neighbouring Poland created a stir in central European markets by hiking one month earlier than most investors had expected on Wednesday.

The crown traded at 28.679 against the euro at 1420 GMT, down from a brief rise to 28.66 following Tuma's comments and weaker from 28.575 late on Wednesday. It has suffered from the yield discount which has reduced its allure to foreign investors.

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 the eighth consecutive quarter of annual growth exceeding six 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.

Tuma said board members saw the risks skewed towards a sharper than expected quickening of inflation -- suggesting room for more rate hikes. However, he said he could predict neither the timing nor the size of next rate moves.

Policymakers have said the weak crown, the firm economy and rising household spending would require a gradual rise in interest rates over the coming year and a half.

Profiles of CNB board members: [ID:nL28883806]

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

Keywords: CZECH CENTRALBANK/RATES