RPT-Czech c.bank turns hawkish, boosts rate hike bets

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By Marek Petrus

PRAGUE (Reuters) - The Czech central bank (CNB) signalled on Friday it was ready to raise the European Union's lowest interest rates above 3 percent soon, boosting the chances of another hike as early as this month.

The prospect of inflation breaching the 4 percent upper edge of its target tolerance band next year led the CNB to toughen its rhetoric in minutes from policymakers' latest meeting and a quarterly Inflation Report.

"A majority of the board members agreed on the need for another interest rate increase if the current forecast was met," said minutes from the July 26 meeting.

Policymakers "debated at some length" the pros and cons of a 50 basis point hike -- bolder than markets had anticipated at the time -- before voting 6-1 to hike the main rate by 25 basis points to 3 percent .

The one undisclosed dissenter voted for half a point rise [ID:nL26800751].

Policymakers confirmed the turn to a distinctly hawkish stance at Friday's seminar with analysts, which was closed to the press, according to people who attended the meeting.

The hawkish communication made analysts believe doves on the CNB board were now in a minority, with some of the once dovish board members even turning into hawks.

"We expect another 25 basis point hike already in August. A very swift firming in the crown beyond 27.50 per euro is a risk that would cause a delay," said David Navratil, economist at Ceska Sporitelna in Prague who attended the seminar.

The crown held a thin range around 28.05 per euro on Friday. Forward money market rates inched up, with investors betting on a rate rise to 4 percent within 12 months.

GIVING UP ON "GRADUAL" STEPS

The July Inflation Report, a key input for policy decisions, set the stage for further rate hikes to combat price pressures from buoyant consumer demand and a tight labour market in the economy whose growth rate has topped 6 percent in past quarters.

The projection of a steep increase in inflation to more than 4 percent in 2008 from 2.5 percent estimated for July is forcing the CNB to act to defend its goal of keeping price growth within one percentage point either side of 3 percent.

The inflation outlook implied "growth in nominal interest rates," abandoning the previous April report's reference to "a gradual rise" in credit costs.

The CNB is counting on crown stability around current levels through the end of this year, differing from market expectations of the currency's firming to 27.80 within six months [CZK/POLL].

A renewed crown rise might improve the inflation outlook in the small and open economy, cutting import prices and eating into firms' export revenue.

Several analysts said the crown's nearly 2.5 percent rise since early July could tame policymakers' resolve to rush with a further rate hike, delaying tightening until at least September.

"However, it is a close call and an August hike would not be too surprising for us," said Miroslav Plojhar at JP Morgan.

FULL TEXT OF JULY 26 MEETING MINUTES..[ID:nL03554277] FACTBOX ON JULY CPI REPORT............[ID:nL03209552]