RPT-INTERVIEW-Czech c.banker advocates cautious tightening

(Repeats story published late on Wednesday)

By Marek Petrus

PRAGUE, Oct 18 (Reuters) - Benign inflationary pressures in the Czech economy should allow the central bank (CNB) to adopt a cautious approach to a further tightening of monetary policy, CNB policymaker Jan Frait told Reuters on Wednesday.

In an interview, Frait said an expected cooling in the booming economy and a decline in commodity prices were likely to help to sustain low inflation, giving the CNB no reason to jump on the monetary brakes with a series of interest rate increases.

Therefore, he said, it would be desirable to take a break after an interest rate increase to see the effect that policy tightening has on the economy and also to check whether the bank's assumptions backing the move prove correct.

"It is being confirmed that despite a cyclical recovery in the Czech economy and the past rise in commodity prices, inflation pressures have been very moderate," said Frait, one of seven Czech interest rate-setters.

"In my view, monetary conditions are more or less neutral at the moment, meaning they are neither loose nor tight, and based on the current information, I am in favour of a cautious approach, of some kind of gradual way," added the policymaker.

His remarks suggested he would prefer rates to stay on hold at the Oct. 26 CNB board meeting, after 25 basis point increases in July and September that took the repo rate to 2.50 percent, 75 basis points below the main euro zone rate.

"The short-end of the yield curve fell in response to his remarks," said Miroslav Frayer, analyst at Komercni Banka.

Forward money-market rates <CZKFRA> shed as much as 5 basis points after the news, cutting the chances of a possible November rate hike to slightly less than 50 percent, according to Reuters calculations.

Frait said he expected no big changes to a forecast made in July that annual consumer price inflation would pick up to 3.3-4.7 percent within 18 months. But he added that he did not yet know details of the new forecast, due for release next week.

Inflation ran at 2.7 percent in September, a touch below the 3 percent midpoint of the CNB's inflation target.

CONTRADICTORY MARKET EXPECTATIONS

Frait, an advocate of accommodative policy to help cushion the economy from a long-term firming trend in the crown, said he did not see the recent policy tightening moves as the start of a series of rate increases.

Instead, he called the past rate rises a "level adjustment" driven by an economic upturn at home and a rise in inflation and interest rates across the world.

"In my view, there is no need for a series of rate increases to dampen some unambiguous inflationary pressures," said Frait. "I believe there is still a long way to go to normalise interest rates with their historical levels."

But he said there were big question marks over the outlook for the global economy and how any growth slowdown might be felt at home. This was his biggest uncertainty, he added.

He also said a growing fiscal deficit, coupled with some worsening in the external balance and four months of political paralysis due to a parliamentary stalemate, had lowered the risk of a sharp firming in the crown.

Recent crown levels were roughly in line with the bank's assumptions, he said. But renewed currency firming could slow interest rate increases, while, conversely, any shift towards market expectations of a crown drop could speed up rate hikes.

The crown has hovered between 28.10-28.60 per euro <EURCZK=> over the past month.

But Frait said investors' expectations of crown firming -- to all-time highs around 27.7 per euro within a year, according to a recent Reuters poll -- appeared to contradict the forecast interest rate increases built into the yield curve.

"Apart from what, in my view, are not insignificant interest rate increases, market participants expect what is not an insignificant crown firming, and this is not very compatible.

"In the past, such expectations have not always been confirmed," added Frait, a 40-year-old professor in monetary policy, whose renewable mandate ends at the end of November.

He said he is ready to stay if asked but President Vaclav Klaus has not said whether he will re-appoint or replace him. ((Editing by David Stamp; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477))

Keywords: ECONOMY CZECH CBANKER