UPDATE 3-Czech c.bank holds fire on policy tightening

(Adds new comments on rate outlook, likely cut in CPI target)

By Marek Petrus

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

The six policymakers present at the monthly policy meeting voted 5-1 to hold the key rate at 2.50 percent <CZCBIR=ECI>, a record 75 basis points below the main euro zone rate. The lone dissenting member voted for another 25 basis point hike.

Czech policy interest rates are the lowest in the European Union again after Sweden raised its key rate to 2.75 percent earlier in the day.

But CNB Governor Zdenek Tuma in slightly hawkish comments, confirmed market expectations the CNB will continue tightening policy in the coming quarters, mirroring the global trend towards higher borrowing costs.

The CNB began the rate hike cycle last year, lifting the key rate from an all-time low of 1.75 percent, to contain inflation amid robust manufacturing activity and a revival in consumption.

The bank released a quarterly update to growth and inflation forecasts, raising the mid-point of its price growth prediction for 18 months ahead to 4.2 percent from a previous 4 percent and looking for faster economic growth next year.

"In line with the previous forecast is this (new) prediction, which is consistent with a rise in interest rates," Tuma said in remarks which analysts said failed to dispel uncertainty about whether the market should expect a hike in November or December.

Consumer prices grew 2.7 percent in September, in line with the CNB's goal to keep inflation in a tolerance band of plus or minus one percentage point from a 3 percent target mid-point.

The crown held at 28.350 per euro <EURCZK=> after Tuma's remarks, retaining a gain of about five percent year-to-date. Debt yields and money market rates remained lower on the day.

MORE HIKES ON CARDS

All but two of 24 economists in a Reuters poll last week had expected the CNB to stand pat after the September rate hike.

"There is no need to rush with a rate increase," said Ales Michl, analyst at Raiffeisenbank. A forecast fall in inflation toward 1.5 percent before the year-end, albeit temporary, allowed the CNB to take its time to weigh its next steps.

But a possible weakening in the crown on jitters over the deteriorating budget outlook and unstable domestic politics, along with a likely euro zone rate increase in December, could yet raise the chances of an additional rate hike this year.

"Tuma sounded rather hawkish and signalled that more rate hikes are on the cards, although a lot of tightening has already been priced into the yield curve," said Daniel Kozel, portfolio manager at PFF Asset Management.

Tuma said the bank was "very likely" to cut its inflation target once the country has set a new euro adoption road map following a joint decision by the CNB and the government to scrap the original 2010 target date.

Policymakers worry the current inflation goal might permit price growth to breach the test for euro adoption, which was 2.77 percent based on September consumer price data.

Tuma said the target's mid-point could be lowered to 2.5 percent or even 2.0 percent, raising the prospect of a sharper than expected monetary tightening further down the road.

"In itself, this could entail tighter monetary policy, but only when there is a clear euro adoption strategy and the CNB starts focusing on the lowered target, so it does not mean much for short-dated rates at the moment," said Kozel at PPF.

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

((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 RATES