RPT-POLL-Czech central bank seen pausing tightening drive

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By Jan Lopatka and Mirka Krufova

PRAGUE (Reuters) - The Czech central bank (CNB) will pause its interest rate tightening drive this month due to a firmer currency and softer foreign monetary policy outlook, a Reuters poll showed on Thursday.

The survey of 16 analysts showed 15 expected the bank's governing board to leave the main two-week repo rate used for draining market liquidity flat at 3.25 percent when it discusses policy on Sept 27. Just one forecast a 25 basis point hike.

The bank raised rates three times in the past four months, with the latest quarter-point move in August, due to rising consumption in an economy growing at an annual rate of 6 percent.

But analysts said there was no need to hurry with further tightening.

"Several important anti-inflationary factors appeared, such as stronger currency, fall in adjusted inflation in August, (and) the lingering uncertainties associated with market turmoil, which partly counterpoise the inflationary risks stemming from ongoing economic expansion and labour market tightening," said Vojtech Benda, senior economist at ING Wholesale Banking.

The crown has been the main surprise softening the outlook since the CNB's latest quarterly inflation forecast in July.

A global run away from carry trades, which use low-yielding currencies such as the yen or the crown to finance positions in higher-yielding assets, reversed the crown's weakening trend seen in the first half.

The currency has gained 4.5 percent against the euro since its July low and reached a new all-time high at 27.385 on Monday before it slipped back to 27.565 on Thursday. The market believes the central bank expected the crown at around 28.2 to the euro in its forecasts.

Two central bankers - Vice-Governor Ludek Niedermayer and board member Vladimir Tomsik - suggested over the past week that interest rates may stay where they are, at least for now, supporting the market feeling that no hike was on the cards this month, after a tight 4-3 vote on the last move in August.

A softening outlook for European Central Bank rates, due to the global credit crunch, is another reason why the Czechs do not need to hurry, analysts said. A separate Reuters poll on Wednesday showed the market saw the ECB only hiking by a quarter point to 4.25 percent in early 2008.

However, the trend in the Czech Republic remains toward higher inflation, due to the combination of a tightening labour market, strong household demand, rising food prices and the possible seep-through of tax changes approved last month.

The central bank's July forecast saw inflation rising to 3.5-4.9 percent in June next year, compared with 2.4 percent in August, and above the bank's 3 percent target which allows for fluctuations of +/- 1 percentage point.

The poll showed that out of the 15 analysts seeing no hike in September, 11 forecast at least one more quarter-point tightening by the end of the year, most likely in October.

"We believe inflation will accelerate quite significantly," said Jiri Skop, an analyst at Komercni Banka, which sees no hike now but two hikes by the year end.

"When we also include the newly approved fiscal reform as well as a stronger increase of future food prices, which now looks more likely, we see the headline inflation rate above 5.0 percent throughout the next year," he said.

** For table showing poll results, click on [ID:nL20797605] or

Keywords: CZECH RATES/POLL