Czech Sept shop prices fall, rate hike bets tamed

PRAGUE, Oct 9 (Reuters) - Czech consumer prices posted a sharper than expected drop in September from August, easing pressure on the central bank (CNB) to keep tightening policy fast to contain demand in the booming economy.

Data published on Monday showed the consumer price index (CPI), an inflation gauge targeted by the central bank, fell 0.7 percent month-on-month, mainly because of a seasonal 18.2 percent drop in holiday prices, lower fuel costs and declining food prices.

The fall exceeded the market consensus forecast of a 0.5 percent drop and squeezed the annual inflation rate to 2.7 percent, below the 3 percent midpoint of the CNB target.

"This number could tame expectations of a fast interest rate increase," said David Marek, chief analyst at Patria Finance.

Even before the data, the central bank had been expected to pause in credit tightening in October, following two quarter-point rate increases in July and September.

But financial markets have bet on another quarter point hike before the year-end, and analysts said the data did little to change expectations of further tightening.

"We were surprised by the food price drop, as we had expected an increase. Demand inflation stagnated year-on-year, in line with our expectations," said Jan Vejmelek, head of economics and strategy research at Komercni Banka in Prague.

"In the immediate reaction to the data, money market interest rates may drop, but there is no reason to alter the outlook for their long-term growth and return to neutral levels," he added.

The crown stagnated around 28.200 per euro <EURCZK=> after the inflation report. Government debt yields were mixed and little changed.

The Czech Republic has the lowest level of interest rates in the European Union along with Sweden, with the key policy rate at 2.50 percent, a record 75 basis point discount to the European Central Bank's benchmark rate.

CNB policymaker Jan Frait, seen as an outspoken advocate of accommodative policy, on Monday reinforced expectations of further tightening, saying in a weekly newspaper that the state of the global economy called for higher Czech interest rates. ((Reporting by Marek Petrus; editing by Ruth Pitchford; 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; editing by Ruth Pitchford))

Keywords: ECONOMY CZECH INFLATION