UPDATE 2-Czech c.bank holds rates, but keeps hawkish bias

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By Marek Petrus

The Czech central bank (CNB) held interest rates steady on Wednesday while keeping a hawkish bias for monetary policy, opting to wait for more information on inflation in the light of the crown's record strength.

Five of the CNB's seven policymakers voted to keep the main two-week policy repo rate at 3.50 percent at their monthly meeting. The decision to leave rates at their highest level in 5-1/2 years and 50 basis points below the euro zone equivalent had been largely expected.

Two members called for another 25 basis point increase after a similar move in November. Benchmark credit costs have doubled from an all-time low of 1.75 percent in October 2005, as the CNB clamped down on inflation expectations in the booming economy

Governor Zdenek Tuma said the main argument for further policy tightening was preventing inflation expectations from soaring. Inflation is forecast at 6 percent-plus for early next year.

"I see the risks (to the forecast) skewed rather in the pro-inflationary direction, or if interest rates were to move in one or in the other direction, then I believe it is more likely that it will be upwards," he told reporters.

All analysts agreed that the outlook for consumer prices justifies a pre-emptive rate rise soon to anchor inflation expectations at a low level.

Soaring food prices boosted annual inflation to a six-year high of 5 percent in November, well above the 4 percent upper edge of the CNB's comfort zone as well as its staff forecast.

However, a majority of analysts in a Reuters poll said the record strength of the crown and the prospect of slowing consumption growth, which are both likely to work to tame inflation, would make policymakers hold off from tightening policy just yet.

RATE RISE SEEN IN EARLY 2008

The CNB has not changed interest rates at a pre-Christmas meeting since 1998 when it cut the main rate to 9.50 from 10.50 percent. Many analysts also said the board would be loath to tighten policy less than three weeks since the last rise.

The next scheduled rate meeting is on Feb. 7 when the board will also have a quarterly update of its inflation projections.

Of the 11 analysts who expected no rate change in December, 10 forecast a 25 basis point increase in the first quarter and one saw such a rise in the second quarter of next year.

"I would imagine that the board opted to wait for the updated quarterly inflation report for guidance on the inflation risks and outlook going forward," said Silja Sepping, economist at Lehman Brothers in London.

The crown has rallied nearly 10 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 currency's strength tends to filter quickly through to the Czech economy, taming import price inflation and eating into firms' export sales.

The crown weakened to 26.300 per euro by 1441 GMT from 26.160 just before the decision, but held within sight of last week's lifetime high of 25.933.

(editing by David Stamp)

Keywords: CZECH RATES/

[PRAGUE/Reuters/Finance.cz]