RPT-Czech c.bank to hike rates by 25 bps in July

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By Mirka Krufova and Marek Petrus

PRAGUE (Reuters) - Czech interest rates are set to rise on Thursday to prevent a weak crown and buoyant spending from stoking inflation pressures in the strong central European economy, a Reuters poll showed.

All but one of 15 analysts in the poll expect the central bank (CNB) to raise the policy rate by a quarter of a percentage point to 3.0 percent, its highest in nearly 5 years, at a monthly meeting on July 26.

One lone voice, Pavel Capouch of Prague-based mergers & acquisitions consultancy CN Finance, expected no rate change until September at the earliest.

The two-week repo rate , the CNB's open money market tool, last rose 25 basis points in May after Governor Zdenek Tuma cast a decisive vote for the first rate increase in 8 months.

Since then, statements by board members have turned hawkish in the face of a sharper pick-up in inflation than forecast.

"The biggest (upside) risk to CPI growth represents a widening of the interest rate disadvantage -- presuming euro zone rates rise further -- which could result in a further depreciation of the crown and hence higher imported inflation," said Vojtech Benda, senior economist at ING in Prague.

"The CNB has no other choice but to go on with gradual rate increases," he added.

The CNB said on Thursday that all seven board members would attend the July 26 monetary policy meeting.

Czech rates are the third lowest among developed economies after Japan and Switzerland, which has turned the crown into a popular source of funds for investors looking to profit from investing in high-yield currencies and assets elsewhere.

The crown has shed nearly 3 percent so far this year versus the euro, underperforming regional peers Hungarian forint, Polish zloty and Slovak crown.

Economists expected policymakers to back up a rate rise with upwardly revised inflation projections for up to 18 months next week, as the economy's expansion remained strong after topping 6 percent annually over the past two years.

Annual inflation ran at 2.5 percent in June, half a percentage point above the CNB's forecast from April, which saw price growth creeping up to between 3.2 and 4.2 percent at end-2007 and hover between 2.7 and 4.1 percent at end-2008.

That forecast was already a far cry from the past five years when average inflation remained in the lower half, or even undershot, the CNB's target tolerance band, which is 1 percentage point either side of the 3 percent goal.

Of the 14 analysts calling for a July hike, all but two forecast another quarter-point increase before the year-end. The two saw it coming only in the first quarter of next year.

The median forecast for the repo rate 12 months from now was 3.50 percent, unchanged from a similar poll in June but up from 3.25 percent in a May survey and 3.00 percent in April.

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