UPDATE 1-Czech July CPI ebbs, may delay another rate rise

...

By Marek Petrus

Czech inflation ebbed to a four-month low in July, confounding market expectations of a further quickening and weakening the case for another interest rate increase as early as this month.

The consumer price index (CPI), a broad gauge of inflation targeted by the central bank (CNB), rose 0.4 percent in July from June , the Statistics Bureau said on Wednesday.

The annual inflation rate slowed to 2.3 percent from 2.5 percent in June. Analysts polled by Reuters had expected 2.6 percent annual gain in consumer prices [POLL/CZ].

"Inflation took a breather and hawks at the CNB can breathe a sign of relief," said Pavel Sobisek, economist at UniCredit Global Markets. "Lower than expected inflation makes the CNB likely to wait with a further rate rise until September."

The CNB had forecast 2.5-2.6 percent inflation for July in a quarterly projection unveiled last month following a 25 basis point hike in its policy rate to 3 percent, the second such move this year [ID:nL26800751].

Policymakers have signalled tighter policy would be required to keep price growth within the tolerance band of 1 percentage point either side of the 3 percent target over the medium-term.

"The Czech financial market had had a dilemma as to whether to expect one or two more rate hikes this year. The number seems to suggest that only one additional rate hike is likely," said David Marek, chief analyst at investment house Patria Finance.

"It seems expectations may shift in favour of a 25 basis point rate increase in October, and not earlier."

The crown slipped as low as 28.185 per euro in a knee-jerk reaction to the data. It was back at 28.160 by 0740 GMT, about a quarter percent weaker on the day and 2.4 percent lower in the year-to-date.

The softer inflation figure helped debt yields and money market rates hold flat or move slightly lower and resist a yield rise in global markets [GVD/EUR].

Despite the July surprise, analysts stuck to their estimate of a sharp revival in price growth in the coming months. A Reuters poll on Tuesday gave a median forecast of 3.7 percent inflation at end-2007 [ID:nL07870329].

The CNB has projected the headline CPI will rise to 3.5-4.2 percent at end-2007 and 3.5-4.9 at end-2008.

A separate release showed the jobless rate edged up to 6.4 percent in July as new graduates entered the labour market, coming in a touch below the analysts' forecast of a rise to 6.5 percent from June's long-term low of 6.3 percent.

The central bank has warned a tight labour market could push inflation higher, adding to price pressure stemming from robust economic expansion, which has topped 6 percent annually in the past eight quarters.

"Unemployment will attack levels below 6 percent in the autumn thanks to economic growth," said Ales Michl, analyst at Raiffeisenbank. "The increasingly tight labour market is the main argument for the CNB to raise interest rates further."

INSTANT VIEW OF CPI DATA.....................[ID:nL08620278]

[PRAGUE/Reuters/Finance.cz]