RPT-Czech cbank sees euro convergence, but budget worse

(Repeats story published late on Thursday)

PRAGUE, Oct 19 (Reuters) - The Czech economy has become more convergent with the euro zone in some areas but the deteriorating fiscal outlook and inflexible labour market remain a key risk for euro adoption, the central bank said on Thursday.

In a summary of its annual assessment of the country's readiness to join the euro zone, the bank said the Czech economy is closely linked with that of the euro zone, but Czech and euro zone GDP growth cycles differ significantly.

The bank's assessment is part of a package annually submitted to the government, jointly with the Finance Ministry.

A growing fiscal deficit exceeding the euro zone entry limit of 3 percent of GDP is widely expected to lead Czech government and central bank policymakers formally to abandon the goal to adopt the euro in 2010, as the country pledged last year.

"According to the results of the conducted analyses there have been partial movements in both favourable and unfavourable directions," the bank said.

"Further convergence of GDP and price level in the Czech Republic toward the euro zone... can be marked as positive. Positive factors also include high economic interconnection with the euro zone including a convergence of interest rates, the exchange rate developments and high level of stability of the banking system."

But the GDP growth cycle was different and other risks stemmed from the unconsolidated fiscal gap and inflexible labour market.

The Finance Ministry expects the public sector gap to grow to 4.2 percent of GDP next year from 3.5 percent this year, far above the 3 percent limit for euro adoption.

"Still low price levels create room for a real exchange rate appreciation, which could -- after adoption of the euro -- be reflected in inflation differentials and low, probably also negative, real interest rates," the bank added in a statement.

The slippage in the outlook for euro adoption has mirrored similar delays in other new EU member states, which have been caused mostly by loose fiscal policies and inflation. ((Reporting by Marek Petrus and Jan Lopatka; Editing by Gerrard Raven; 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 EURO