RPT-INTERVIEW-Czech c.banker says rate hike pause possible

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By Marek Petrus

LONDON (Reuters) - The Czech central bank (CNB) may make a pause in raising interest rates because the crown has risen towards record highs and the economic outlook is uncertain, CNB Vice-Governor Ludek Niedermayer said on Friday.

In a written response to Reuters questions, Niedermayer said the CNB's current 3.25 percent repo rate could be, at least for now, consistent with the goal of keeping inflation on a 3 percent target on a 12-18 month horizon.

"It is possible, but not certain, that interest rates have now reached a level where it would be possible to leave them unchanged for some time," said Niedermayer.

"Uncertainties relate to both domestic and external developments. I do not consider the latter as having stabilised yet following recent turbulences," he added.

The CNB raised its benchmark two-week repo rate to a five-year high of 3.25 percent in August, its sixth hike since lifting benchmark borrowing costs from an all-time low of 1.75 percent in October 2005.

Niedermayer said robust, about 6 percent annual growth in the domestic economy and a projected rise in inflation above its comfort zone around its target next year implied a "significant interest rate rise" in the bank's quarterly forecast in July.

But he suggested the global market turbulence sparked by the U.S. home loan crisis and resulting uncertainty, together with the crown's 4.7 percent rise versus the euro since July and some weaker domestic data, reduced the urgency of further tightening.

MIXED SIGNALS

The CNB has raised rates in two steps by a combined 50 basis points in as many months on the basis of the July forecast.

"The fact that there are now downside risks, in my view, does not mean the view of the direction where interest rates are headed changes compared with what the forecast expected," said Niedermayer, seen as the prime hawk among the CNB's seven policymakers.

"The adequate rise in interest rates, however, is lower than would have been the case had the assumptions of the forecast been fulfilled," he said.

He said he found the crown's recent rise difficult to interpret. Economists believe the CNB had assumed in its July forecast that the currency would hold around 28.0-28.20 against the euro in the near-term.

The crown showed no visible reaction to Niedermayer's comments, trading at around 27.450 per euro on late Friday afternoon, within sight of a life-time high of 27.410 hit late last year and matched early this year.

Turning to the inflation outlook, Niedermayer said price indicators were sending contradictory signals.

"New data so far do not indicate that a turnaround in the economy's developments towards a growth slowdown would be taking place," said Niedermayer.

"Besides relatively high cost indices there is CPI, which does not show signs of quickening, and adjusted inflation (net of one-off items such as taxes and volatile prices of food and fuels), which even posted a significant fall.

"But I am leaning towards an opinion that the fall in adjusted inflation should not be overestimated," he said.

He also said the tight labour market called for caution.

"It cannot be ruled out that falling unemployment, record-high supply of jobs and even signals of an overhang of demand for capacities over supply in some firms or industries will lead to higher wage growth, thus giving further support to domestic consumption," said Niedermayer.