UPDATE 2-Czech c.bank holds fire on policy tightening

(Adds central bank chief comments)

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 main rate at 2.50 percent <CZCBIR=ECI>, a record 75 basis points below the main euro zone rate level. The one dissenting member voted for a 25 basis point hike.

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

The CNB also released its quarterly update of growth and inflation forecasts, cutting the 2006 GDP outlook to 5.8-6.6 percent from a previous 6.0-7.2 percent. Inflation in September 2007 is seen at 2.8-4.2 percent.

"Compared with the forecast from the previous quarter, interest rates are seen slightly lower in the short term," CNB Governor Zdenek Tuma told a news conference.

"However, in the longer term, they more or less return to the trajectory assumed in the previous (July) prediction."

All but two of 24 economists in a Reuters poll 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 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.

MORE HIKES ON CARDS

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.

Inflation ran at a 2.7 percent annual rate in September.

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.

But investors were unsure whether to bet on a rate increase as soon as November or December.

"We consider last month's hike as the last chance for tightening before the end-year when inflation will collapse to 1.5 percent and it will be difficult to justify another rate increase," said David Netusil, money market trader at CSOB bank.

But 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 yet raise the chances of an additional rate hike this year.

Policymakers in other large central European economies, with the exception of Poland, 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 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