UPDATE 3-Czechs hold rates for second month as crown firms

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By Marek Petrus

The Czech central bank (CNB) board left interest rates unchanged for a second consecutive month on Thursday despite some calls for a hike, but stuck to a tightening policy bias in the face of a record strong crown.

CNB policymakers kept the main two-week policy repo rate at a five-year high of 3.25 percent, but said 5 board members voted in favour of holding rates, while two wanted a 25 basis point hike.

The CNB has hiked rates by 150 basis point between October 2005 and August 2007 as it has striven to contain price pressures in the booming economy and Governor Zdenek Tuma told a news conference further tightening was a matter of when, not if.

"As far as the timing and size of an interest rate increase is concerned, we are once again not being explicit. It will depend on the evolution of risks (to the forecast)," he said.

"(A hike) may happen next month or it may come at the beginning of next year, I am not able to foresee that," Tuma said adding that the bank's updated macroeconomic predictions were "consistent with a rise in nominal interest rates".

The decision kept 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 doubt their predictions.

The no-change verdict, based on an updated inflation that Tuma said had not changed "substantially" from the July expectations, signalled that rate-setters expect the crown's 6 percent rise to the euro since early July to curb demand-pull inflation, their main concern.

"In our view, the strong crown ... is behind the CNB's decision. However, we believe this is likely to be only a pause in the monetary tightening cycle," said Jaromir Sindel, economist at Citibank in Prague.

He forecast inflation concerns would make the CNB tighten by 25 basis points in November, but added a further firming in the crown was likely to delay rate hikes and limit their scope.

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

The crown scaled a lifetime peak of 27.070 to the euro after the CNB's rate decision, benefiting from a healthy economy which has made it a safe haven for investors fretting over a U.S. economic growth slowdown.

The currency is 3.8 percent above levels around 28.00-28.20 which the CNB's staff used to draw up the previous quarterly inflation projections in July.

Short-dated money market rates dropped on the no-change rate decision, but remained 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]