UPDATE 1-Czech c.bank raises rates to 5-year high

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PRAGUE, July 26 (Reuters) - The Czech central bank (CNB) raised interest rates to a near five-year high on Thursday, matching market expectations that tighter policy was needed to confront risks stemming from a weaker crown and strong growth.

Policymakers raised the main two-week repo rate used to mop up excess money market liquidity to 3 percent after a quarter-point hike in May. Despite the move, the Czech policy rate remained the lowest in the European Union .

CNB Governor Zdenek Tuma will hold a news conference at 3:30 p.m. (1330 GMT) to elaborate on the decision which narrows the yield discount versus the euro zone benchmark borrowing costs to 100 basis points from the previous record high.

The crown ticked up to 28.113 against the euro after the move but later clawed its way back to late Wednesday's levels around 28.120 by 1045 GMT.

Financial markets have been gearing up for higher credit costs after consumers helped to propel the central European economy in early 2007 to the eighth consecutive quarter of annual growth exceeding six percent.

All but one of 15 analysts in last week's Reuters poll forecast a 25 basis point rate hike on Thursday. [CNB/INT].

The yield disadvantage, dampening the crown's allure to foreign investors, has led to the domestic currency shedding more than 2 percent weaker in the year-to-date, while inflation looks set to overshoot the CNB's target of 3 percent before the year-end.

Consumer inflation has quickened to within the tolerance range of one percentage point either side of the CNB's 3 percent goal, running at 2.5 percent year-on-year in June .

The inflation pick-up has mainly reflected higher cigarette taxes and a rise in electricity and other government-regulated prices, with policymakers' preferred gauge excluding the primary effects of tax changes staying quite low.

But analysts, and some central bankers, have cautioned against a further blossoming of underlying price pressures stemming from buoyant consumer demand and signs of labour shortages in the car-making and other industries.

At the news conference, the CNB was widely expected to unveil an upwardly revised inflation projection, possibly raising the prospect of price growth attacking the upper edge of its target tolerance band later this year or early next year.

In June, inflation was already half a percentage point above the CNB's previous forecast from April which saw annual growth in consumer prices at 3.2-4.2 percent at end-2007 and 2.7-4.1 percent at end-2008.

Board members' recent remarks on policy: [ID:nL26743022]

Profiles of CNB board members: [ID:nL28883806]