RPT-Czech c.bank surprises, votes 5-2 for hike

(repeats item from Wednesday)

By Jan Lopatka

PRAGUE, Sept 27 (Reuters) - The Czech central bank (CNB) voted 5-2 in favour of a 25 basis point interest rate hike on Wednesday, wrong-footing many analysts who had largely expected policymakers to hold off tightening until next month.

The decision, however, was not a complete surprise after unexpected tightening moves this week by fellow central European banks in Hungary and Slovakia, and amid a worsening Czech fiscal outlook, growing household demand and a weaker crown currency.

The Czech decision puts the 2-week repo rate at 2.50 percent, 50 basis points below the key euro zone rate. Czech rates remain the lowest in the European Union, alongside Sweden.

CNB Governor Zdenek Tuma told a news conference the move was consistent with the central bank's July forecasts, and that risks to the forecasts were slightly pro-inflationary.

"There were no big surprises in the discussion, the development was more or less consistent with our expectations and our forecast," he said.

"The opinion prevailed that while arguments always exist for both sides ... the proper reaction in the given situation is an interest rate increase."

Increased political turmoil and rising inflationary pressures have swept across central Europe as economies try to converge with the West.

Red hot growth has been accompanied by rising wages and domestic demand. Meanwhile, political turbulence has dampened enthusiasm for fiscal reforms key to adopting the euro.

In Poland, the central bank left rates steady as expected on Wednesday. But this week Slovakia has surprised markets by raising rates a quarter percentage point while Hungary delivered a half percentage point increase, when slim majorities of analysts and traders had predicted only a quarter point rise.

"I think there will now be a halt in the tightening cycle to the end of the year. The next hike will be at the beginning of next year," said Patrik Rozumbersky, an analyst at Zivnostenska Banka, on the Czech decision.

BUDGET WORRIES

The crown currency, which is key to inflation development in the small open economy, firmed to 28.400 to the euro <EURCZK=> at 1035 GMT from 28.425 just before the decision.

Last month, the central bank's board voted unanimously to hold rates steady and said it saw balanced risks to its July quarterly inflation forecast, which envisaged gradual rate hikes and inflation at 3.3-4.7 percent at end-2007, above the bank's 3 percent target.

Tuma said higher August inflation and the fiscal situation are the main upside risks to the inflation outlook, while a political stalemate since an inconclusive June general election was likely to hit state finances.

The government has approved a 2007 state budget consistent with a public sector deficit at 4.0 percent of gross domestic product, far above the 3.3 percent cap in its euro convergence programme and almost certainly ruling out adoption of the common currency as planned in 2010.

"Given how the situation is developing, mainly the political situation, it wll be very difficult to achieve sufficient consolidation in the area of public finance," Tuma said.

"We are perceiving a growing risk that budgets in the following years may be negatively affected."

The jump is due mainly to benefit handouts before the elections, which produced a weak minority cabinet that is likely lose a confidence vote next week.

"I do not take today's step as a fight with inflation, because the CNB's influence over inflation is very limited, but only as a gradual return of monetary expansion to neutral," said Petr Dufek, an analyst at bank CSOB. ((Reporting by Jan Lopatka, editing by Ruth Pitchford; prague.newsroom@reuters.com; Reuters Messaging: jan.lopatka.reuters.com@reuters.net; +420-224 190 474))

Keywords: ECONOMY CZECH RATES