UPDATE 1-Czech c.bank keeps rates steady as expected

(Adds background, market reaction)

PRAGUE, Oct 26 (Reuters) - The Czech central bank (CNB) kept its benchmark interest rate steady on Thursday, matching market expectations that it would make a pause in tightening after a quarter of a percentage point hike last month.

The six policymakers present at the monthly policy meeting voted to hold the main rate at 2.50 percent <CZCBIR=ECI>, the lowest level in the European Union after Sweden raised its key rate by 25 basis points to 2.75 percent earlier in the day.

All but two of 24 economists in a Reuters poll last week had expected the CNB to stand pat after the September rate hike, the third such move since the bank began tightening policy last year.

"There is no need to rush with a rate increase," said Ales Michl, analyst at Raiffeisenbank.

"The pause follows the increases in July and September to assess the state of the economy."

The CNB called a news conference for 1300 GMT, half an hour earlier than originally scheduled, where a quarterly update of the 12-18-month outlook for economic growth and inflation is due for release.

The crown held steady at 28.330 per euro <EURCZK=> after the news, about five percent stronger so far this year. Debt yields and money market rates remained lower on the day.

Investors had expected the CNB to hold fire because of a forecast fall in inflation below the bank's 3 percent target mid-point before the year-end and an increase in market rates since the bank's warning about higher credit costs in July.

Financial markets expect the CNB to continue tightening policy over the coming quarters to keep inflation at bay amid robust manufacturing activity and a revival in consumption.

A possible weakening in the crown on jitters over the deteriorating budget outlook and a five-month-old political crisis, along with a likely euro zone rate increase in December, could raised the chances of another hike before the year-end.

Policymakers in other large central European economies have also nudged interest rates higher this year to respond to accelerating inflation, mirroring the global trend towards higher borrowing costs.

((For table on interest rate decisions of central European central banks, double click on [ID:nL23820301]))

((Reporting by Marek Petrus; Editing by Ian Jones; 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 RATES