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 news, albeit not entirely unexpected by the market, boosted the crown to a lifetime high against the euro.

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.

Price pressures have been building in central Europe's booming economies, and the threat of a spillover of rising prices for food and energy into higher inflation and wage expectations spurred central bankers into action.

Financial markets had been unsure about the Czech decision, 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]. Those not expecting a hike thought the strong crown would outweigh the inflation spike.

"With its prompt action, the CNB clearly showed its resolve to fight inflation," said David Marek, Chief Economist at Patria Finance in Prague.

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.

6 PCT INFLATION

The Czech economy has been growing at about 6 percent for the third year and Thursday's Reuters poll forecast November inflation rate at a six-year high of 4.5 percent, versus the CNB's 3 percent target with plus/minus 1 percent comfort zone.

The outlook is for inflation to leap early next year towards 6 percent, due mainly to a sales tax rise and regulated price hikes, factors which monetary policy can do nothing to contain.

But analysts agreed such an inflation projection justified 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 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 scaled a record peak of 26.360 per euro to firm 0.4 percent from 26.470 just before the rate announcement. It was at 26.370 by 1300 GMT.

Bond yields and money market rates inched mostly higher. (Editing by Alan Crosby and Ralph Boulton)

Keywords: CZECH RATES/

[PRAGUE/Reuters/Finance.cz]