UPDATE 2-Czechs hold rates flat, c.bank chief sounds dovish

(Adds rate vote, quotes from governor, analysts, background)

By Marek Petrus

PRAGUE, Nov 30 (Reuters) - The Czech central bank (CNB) left interest rates unchanged on Thursday and sent a clear signal it could keep borrowing costs at the lowest level in the European Union into next year after a sharp drop in inflation.

The policy board voted unanimously to hold the key two-week repo rate at 2.50 percent <CZCBIR=ECI>, as markets expected, after 75 basis points of rate hikes between October 2005 and September 2006.

"We did not give much serious thought to increasing interest rates," Governor Zdenek Tuma told a news conference after the decision which left the key policy rate at a record 75 basis points below the benchmark euro zone level.

He struck a dovish note, saying he would personally expect the bank to lower its inflation forecast for the next 12-18 months in its January update if inflation stays low and the crown holds firm.

"The statement sounds dovish but, under the current circumstances, anything else could hardly be expected," said UniCredit economist Pavel Sobisek.

All 20 CNB watchers polled by Reuters last week predicted policymakers would keep rates on hold until at least January, as a firm crown tames budding price pressures in an economy growing at an annual rate of about 6 percent.

Inflation fell below the bottom edge of the CNB's target in October, and the currency has rallied to 4 percent against the euro so far this year to lifetime highs earlier this month.

The crown was steady at 27.980 per euro <0#EURCZK=> after Tuma spoke, within sight of the peak of 27.875 seen on Nov. 6. Short-term money market rates and debt yields <0#CZBMK=> fell.

"Expectations of a rate increase are being rather pushed back," said David Marek, chief economist at Patria Finance.

100 BASIS POINT GAP

The gap between Czech and euro zone official rates is set to widen to a full percentage point on Dec. 7, when markets are confident the European Central Bank will hike to 3.50 percent.

But Tuma said the central bank targeted inflation and the rate spread against the euro zone "is not something that we would be paying extra attention to today."

October inflation hit a near 1-1/2-year low of 1.3 percent, outside the target range of one percentage point either side of three percent.

A Reuters poll on Thursday forecast inflation at 1.5 percent in November, and analysts expect it to remain subdued in early 2007 given lower energy costs and the firm crown.

"Inflation in early 2007 is very unlikely to climb to the midpoint of the CNB's target, as was previously expected," said Michal Brozka of Raiffeisenbank.

But economists think the CNB will start tightening again next year to track higher ECB rates and quash any price pressures from robust manufacturing growth, rising employment and a revival in consumer spending.

(Additional reporting by Petra Vodstrcilova) ((For FACTBOX on central European rate verdicts, double click on [ID:nL23215572])) ((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))

Keywords: CZECH RATES/