UPDATE 2-Czech July CPI ebbs, may delay another rate rise

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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, lagging a 2.6 percent market consensus forecast [POLL/CZ] and the CNB's 2.5-2.6 percent projection.

The CNB ascribed the surprise to a lower rise in foreign holiday prices than seen in traditional seasonal patterns.

"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."

CNB Vice-Governor Miroslav Singer told Reuters policymakers' appeared to make the right decision to raise its main rate by 25 basis points to 3 percent in July, and not by half a point move which they also weighed.

"Surprises can always come from either side," Singer, regarded as neutral to slightly hawkish board member, said in a brief interview [ID:nL08394069]. "I think that it is wise to leave room in monetary policy to react to such surprises."

In a snap Reuters poll among 13 analysts, only four still saw another quarter-point rise coming at the next monthly CNB board meeting on Aug. 30 [ID:nL08118209].

A slight majority of eight including UniCredit expected a rate rise to 3.25 percent in September. One analyst did not foresee such a hike until sometime in the fourth quarter.

FUNDING CURRENCY

The crown slipped to 28.170 per euro by 1430 GMT, shedding quarter of a percent on the day. Improved risk-taking sentiment on global markets led investors to re-enter carry trade bets in high-yield assets funded from the low-yield crown.

Higher rates threaten to erode the crown's perceived status as a funding currency. For now the Czech policy rate is the third lowest in developed world after Japan and Switzerland, standing 1 percentage point below the benchmark euro zone level.

Despite the July surprise, analysts stuck to the outlook for a sharp revival in price growth in the coming months.

A Reuters poll on Tuesday forecast 3.7 percent inflation at end-2007 [ID:nL07870329]. The CNB has projected the CPI will rise to 3.5-4.2 percent at end-2007 and 3.5-4.9 at end-2008.

The central bank's outlook implied further policy tightening to keep price growth within the tolerance band of 1 percentage point either side of the 3 percent target over the medium-term.

"We stick to our forecast the CNB base rate will reach 4.5 percent by end-2008, with upside risk. The main arguments for our call remain valid, in our view," said Miroslav Plojhar, economist at JP Morgan.

"Booming consumer demand, the absence of currency appreciation and the rise in indirect taxes will elevate inflation to ... 4-5 percent in the first quarter of 2008."

A separate release showed the jobless rate edged up to 6.4 percent in July, undershooting the consensus forecast of a rise to 6.5 percent from June's long-term low of 6.3 percent.

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

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

SNAP POLL ON ANALYSTS' RATE FORECASTS........[ID:nL08118209]

[PRAGUE/Reuters/Finance.cz]