UPDATE 1-Czech c.banker backs higher interest rates - paper

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Higher interest rates are needed to counter a projected rise in Czech inflation above 5 percent next year, central bank (CNB) Vice-Governor Ludek Niedermayer was quoted as saying in a newspaper interview on Monday.

However, he also told the daily Hospodarske Noviny that he could not rule out an interest rate cut "relatively soon" provided that inflation pressures fade away quickly.

The CNB raised the main two-week repo rate by 25 basis points to 3.50 percent in November, bringing it to its highest level in nearly 5- years.

It remained unclear if Niedermayer considered that increase sufficient to prevent rising consumer prices from boosting inflation and wage expectations in the strong economy, growing at about a 6 percent annual clip for the third year running.

"We believe that the episode of higher inflation, that is probably significantly above 5 percent, will really fade away at the beginning of 2009. It depends, among other things, on whether the second-round effects of a rise in some prices will be tamed and higher inflation will not spill over into inflation expectations of inadequate wage growth," said Niedermayer.

"That's why I am of the opinion that it is necessary to enter this episode with higher interest rates. At the same time, I cannot rule out that it will be adequate to cut interest rates relatively soon provided that inflation pressures fade away quickly," he was quoted as saying.

He said he expected a mild slowdown in economic growth next year due to a worsening outlook for European economies, fiscal reforms curbing public spending and a firm crown currency. He said the crown was "very strong," which has been out of line with expectations of most market players and economic agents.

Czech rates have risen from an all-time low of 1.75 percent in October 2005, and minutes of the CNB's November policy meeting on Friday showed the latest increase was a pre-emptive strike against a possible increase in inflation expectations.

Markets are gearing up for further policy tightening next year to clamp down on inflation, which is expected to spike to 6 percent early next year, double the CNB's target. (Reporting by Marek Petrus, editing by Jacqueline Wong)

Keywords: CZECH ECONOMY/CENTRALBANKER

[PRAGUE/Reuters/Finance.cz]