Czech cbank sees euro convergence, warns on budget

PRAGUE, Oct 19 (Reuters) - The Czech economy has advanced in convergence with the euro zone 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 cycles differ significantly.

"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.

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 to abandon formally the goal to adopt the euro in 2010, as the country pledged last year. ((Reporting by Marek Petrus; 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 EURO