RPT-INTERVIEW-Czech c.banker Hampl eyes more tightening

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By Marek Petrus

The Czech central bank (CNB) will continue raising the European Union's lowest interest rates this year to combat inflation pressures, CNB policymaker Mojmir Hampl told Reuters on Thursday, sending the crown slightly higher.

Hampl said in an interview he might vote for another rate rise at the next meeting of the board on Aug. 30, after July's quarter of a percentage point hike in the policy rate to 3 percent , its highest in nearly five years.

"If you were to ask me whether I would like to vote for a rate rise at the forthcoming meeting, I would answer that I would not rule it out," he said.

"The current situation is such that we are increasingly tied by the straitjacket of inflationary pressures and risks across the board."

Hampl said higher wage growth, firm domestic demand, growing interest rates abroad as well as higher food and oil prices all pointed towards rising price pressures in the economy, which expanded at an annual rate topping 6 percent in the past eight quarters.

Markets see Hampl as a possible swing voter, tipping the balance in interest rate decisions taken by the seven-member CNB policy board.

He said the CNB's projection of a rise in inflation above the 4 percent upper margin of its target range confirmed the broad-based nature of inflation pressures in the economy and gave policymakers strong arguments for interest rate hikes.

"The CNB's board has sent a message that this (July hike) was not the last tightening of monetary policy this year, and I think this message is clear," Hampl said.

His words were likely to reinforce market perceptions that another quarter-point rate increase would come in either August or September [CNB/INT].

The crown inched 0.1 percent higher to the session's high of 28.095 per euro on Hampl's comments.

The Czech unit, seen as a regional funding currency, has risen 2.4 percent since early July as a spike in global risk aversion triggered an unwinding of carry trade bets in high-yield assets funded by borrowing in the low-yield crown.

Hampl said was unfazed by natural currency volatility.

"As an inflation targeter, I am not bothered and yawn in front of the screen about the exchange rate's moves by 1.5 percent in one way or the other in a given quarter," he said. "I am concerned about fundamental trends."

CROWN BOUND TO FIRM

He played down the significance of Wednesday's lower than expected July inflation data, saying they were backward-looking and did not alter the outlook for tighter policy to respond to a pick-up in inflation above the CNB's target later in 2007.

The annual inflation rate slowed to 2.3 percent from 2.5 percent in June, lagging the CNB's 2.5-2.6 percent projection. The CNB is aiming to keep price growth within 1 percentage point either side of a 3 percent target mid-point.

Turning to a long-term outlook, Hampl said the Czech economy has been closing the gap on price and income levels in the richer EU core through a nominal rise in the crown, and not via higher inflation, in the past seven years.

This "convergence" phenomenon made him favour keeping the crown freely floating longer and oppose adopting the euro too soon after the CNB starts aiming at a 2 percent inflation target from 2010.

High fiscal gaps have made the country, an EU member since 2004, delay euro entry beyond the original 2010 target date.

"In my view, the transition to a lower target amid ongoing real (exchange rate) appreciation may also mean that the exchange rate channel should be left open for a longer period," said Hampl, known for his opposition to an early euro adoption.

"That's the only channel through which the further expected real appreciation may occur," he said.

In his view, the crown was bound to extend its long-term firming trend into the next decade if the CNB remains credible and manages to close an inflation gap on the euro zone, where the European Central Bank aims to keep inflation near 2 percent.

FACTBOX ON HAMPL'S POLICYMAKING RULES: [ID:nL09154741]

[PRAGUE/Reuters/Finance.cz]