RPT-Czechs keep rates on hold as crown sets new high

...

By Marek Petrus

Czech central bank (CNB) policymakers kept interest rates on hold for the third month running on Wednesday, responding to the strength of the crown and a sharp fall in inflation.

All seven board members voted to leave the key two-week repo rate at 2.50 percent, the lowest level in the European Union and one percentage point below the euro zone equivalent, after 75 basis points worth of hikes between Oct. 2005 and Sept. 2006.

"The board took a simple stance on the inflation prediction: The risks are skewed in the anti-inflationary direction," Vice-Governor Ludek Niedermayer told a news conference.

All 22 economists in a Reuters poll predicted the CNB would hold policy steady this month after inflation fell well below its target and the currency's rise to record highs tightened credit conditions.

The CNB's inflation forecast in October assumed a further gradual rate rise over the coming quarters to prevent reviving household consumption from fuelling inflation.

But Niedermayer said the interest rate outlook, embedded into the inflation prediction, would be "markedly different" if the bank were to draw it up now. He would not elaborate before a quarterly forecast update in January.

The crown rose to a new all-time high of 27.410 against the euro before Niedermayer spoke, reflecting generally bullish investor sentiment towards emerging markets, as well as a trade surplus and robust, 6 percent growth in the economy.

It traded at 27.484 to the euro by 1524 GMT.

The currency has extended its gains to 6 percent against the euro so far this year, making it the second best performing currency in central Europe after its Slovak counterpart.

Firm currencies also led the Slovak central bank (NBS) to hold its key interest rates flat for a third month in a row on Wednesday. Poland followed suit, also keeping its rates on hold.

'NOT IRRATIONAL' TO EXPECT CORRECTION

The crown has risen 2.5 percent versus the bank's inflation forecast which used 28.3 per euro rate as its assumption.

Niedermayer said it was difficult to find economic reasoning for a further crown firming, and that balance of payments flows, particularly a deepening current account deficit, argued against any further gains in the currency.

"If there is a sharp firming or a weakening in the crown ... it is not irrational to expect the exchange rate could correct," said the vice-governor.

November annual inflation of 1.5 percent lagged the CNB's forecast by 0.4-0.5 percentage point and undershot the bottom of its target, which aims at 3 percent but includes a tolerance range of one percentage point either side.

Analysts said the market would likely review rate forecasts.

"Now is the time when expectations of interest rate changes are being pushed back," said David Marek, chief economist at Patria Finance.

"I personally expect (a rate rise in) April, but am thinking it may even come only in the second half of the year."

Wednesday's policy meeting was the last of the year and the first after this month's appointment of two new policymakers -- Mojmir Hampl and Vladimir Tomsik -- to the seven-strong body. (Additional reporting by Petra Vodstrcilova) ((Editing by Mike Peacock; 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/

[PRAGUE/Reuters/Finance.cz]