UPDATE 1-Czechs hold rates for second month as crown firms

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By Marek Petrus

The Czech central bank (CNB) left interest rates unchanged for a second consecutive month on Thursday, meeting market expectations that the crown's record strength has reduced the urgency for any policy tightening.

CNB policymakers kept the main two-week policy repo rate at a five-year high of 3.25 percent, after 150 basis points in increases between October 2005 and August 2007 aimed at containing price pressures in the booming economy.

The CNB has scheduled a news conference for 1330 GMT to explain its decision, which left the main Czech rate at the lowest level in the European Union and 75 basis points below the euro zone equivalent.

Eleven of 16 economists polled by Reuters last week forecast the repo rate would be unchanged. The rest expected a 25 basis point rise on Thursday, although the crown's rally had made some of them have doubts about their predictions.

The no-change verdict, based on an updated inflation outlook to be released at the news conference, signalled that rate-setters believe the crown's nearly 6 percent rise versus the euro since early July could curb demand-pull inflation, their main concern.

The crown's strength tends to tame price pressures quickly and eat into Czech exports. The sum of exports and imports accounts to 130 percent of economic output.

The crown hit an all-time peak of 18.89 to the dollar and a record 27.12 to the euro on Monday, benefiting from a healthy economy which has made it a safe haven for investors fretting over a U.S. economic growth slowdown.

The crown ticked lower to 27.145 per euro from 27.130 just before the CNB's rate announcement, staying 3.5 percent firmer than levels around 28.00-28.20 which the bank's staff used to draw up the previous quarterly inflation projections in July.

Bond yields and money market rates showed no reaction, trading several basis points higher on the day.

As a rule of thumb, a 3 percent rise in the currency, if sustained, tightens conditions in the Czech economy to the same degree as an interest rate increase of 100 basis points, according to estimates of analysts at bank Ceska Sporitelna.

[PRAGUE/Reuters/Finance.cz]