UPDATE 1-Czech c.bank ups rates to tame resurgent inflation

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By Marek Petrus

The Czech central bank (CNB) raised interest rates by 25 basis points on Thursday, resuming its policy tightening after a two-month pause to clamp down on resurgent inflation in the strong central European economy.

Policymakers bumped up the main two-week repo rate to 3.50 percent , bringing it to its highest level in nearly 5-1/2-years.

The seventh quarter-point rate rise since benchmark credit costs rose from an all-time low of 1.75 percent in October 2005 followed a similar step by neighbouring Poland on Wednesday.

The CNB scheduled a news conference for 3:30 p.m. (1430 GMT) to elaborate on the decision, which narrowed the discount versus the euro zone equivalent to 50 basis points but still left the main Czech rate at the lowest level in the European Union.

Financial markets had been unsure about the outcome, with a small majority of nine of the 17 CNB watchers surveyed by Reuters last week predicting a quarter-point rise against eight forecasting no change [CNB/INT].

Analysts agreed the outlook for inflation to leap early next year towards 6 percent, well above the 4 percent upper boundary of the CNB's comfort zone, justifies a rate rise soon to anchor inflation expectations at a low level.

However, a minority of analysts said a record strong crown and the prospect of a slowing consumption growth, both promising to rein in resurgent inflation, would make policymakers hold off on tightening policy this month.

"It seems that the risks to the inflation outlook -- especially from higher food and oil prices -- outweighed the dampening effects of the stronger crown and more uncertain global economic outlook," said Lauren Van Biljon, analyst at 4Cast consultancy in London.

The crown has rallied nearly 9 percent versus the euro since this year's lows in early July, as investors unwound risky bets in high-yield assets funded out of low-yield crowns and exporters pre-hedged their receipts for next year.

The crown traded slightly firmer at 26.435 per euro by 1110 GMT from 26.470 just before the news, within sight of Wednesday's lifetime high of 26.420.

Bond yields and money market rates were little moved. (Reporting by Marek Petrus; editing by Alan Crosby)

Keywords: CZECH RATES/

[PRAGUE/Reuters/Finance.cz]