UPDATE 1-Czech cbanker sees no reaction to turmoil -agency

...

Czech economic fundamentals remain sound and the central bank (CNB) has no reason to respond to recent global market turbulence, CNB governor Zdenek Tuma said in an interview with Market News International.

"At this moment I don't see any significant impact on the Czech economy on such a scale that monetary policy should respond," he told MNSI in the interview conducted on Monday and released on Tuesday.

Tuma said the CNB was sticking to its tightening bias but added policymakers were unlikely to raise interest rates by 50 basis points at the upcoming monthly policy meeting on Aug. 30.

The CNB's seven rate-setters debated thoroughly a half point hike at the previous meeting in July before opting for a 25 basis point rise in the main policy rate to 3 percent.

In line with the CNB's long-standing practice, the governor declined to predict the pace and timing of future policy moves.

Still, markets saw his comments as leaving the door open to an additional quarter point hike this month to rein in buoyant consumer demand in the economy, where gross domestic product has risen at an annual rate topping 6 percent in the past eight quarters.

Czech debt yields and money market rates have fallen sharply this month to reflect concerns over distress in global credit markets and its impact on the wider economy, which have also raised doubts about a further euro zone rate hike in September.

Softer than expected July inflation numbers and a 4 percent rally in the crown since early July have also chilled expectations of a near-term rate increase, as a firmer currency helps tame inflation in the open economy.

Tuma said there would be "no strong conclusions" for the CNB's policy if the European Central Bank delayed a rate rise, as the Czech central bank did not follow ECB's policy moves.

He said a drop in headline annual inflation to July's 2.3 percent from 2.5 percent in June was not a compelling argument for the CNB to alter its tightening bias, as policy must consider medium-term price trends and look forward.

Forward money market rates and short-term swap rates rose by about 2 basis points on his comments.

"A rate hike this month cannot be excluded despite the crown's firming and slightly lower inflation than both the market and the CNB had expected," said Daniel Kozel, portfolio manager at PPF Asset Management.

[PRAGUE/Reuters/Finance.cz]