UPDATE 2-Czech crown taming inflation, rate hike chances

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By Marek Petrus

The firm Czech crown is eroding the chances of an interest rate rise in the first quarter of this year as it helps tame inflationary pressures, central bankers' comments showed on Wednesday.

Central bank (CNB) Governor Zdenek Tuma told the daily Mlada Fronta Dnes he saw no reason for the crown to "jump significantly" in the space of a few weeks, reiterating his previous stance on the currency.

Tuma's comments were followed by the release of the minutes from a Dec. 20 policy meeting where CNB policymakers agreed the crown posed a "considerable downside risk" to inflation which now looked likely to be weaker than the bank had forecast.

At 2.50 percent, Czech official rates have been the lowest in the European Union and a full percentage point below the euro zone equivalent, reflecting the strength of the currency.

"I do not want to draw any strong conclusions for the first half of the year. But the stronger the exchange rate, the lower the probability that we will nudge interest rates higher in the foreseeable future," Tuma said in an interview with the newspaper published on Wednesday.

The crown has rallied 3 percent versus the central bank's inflation forecast drawn up in October, matching its lifetime peak of 27.410 to the euro late on Tuesday .

But it slid as low as 27.520 early on Wednesday on Tuma's remarks. Government debt yields and short-term money market rates inched lower as investors scaled back their bets on any near-term rise in policy interest rates.

The Dec. 20 minutes said the crown was stronger than the bank had forecast and a "considerable downside risk" to inflation, adding: "The Board agreed the downside risks to the (inflation) forecast were even higher in December than they had been in November."

RATES TO GO UP WHEN CROWN STEADIES

Tuma said he expected the crown's rise to reverse, especially given the record interest rate discount versus the euro zone, a deepening current account deficit and political uncertainty since an inconclusive election in mid-2006.

"I do not see reasons for the crown to jump significantly within a few weeks," Tuma was quoted as saying. "I do not like to see the crown frequently move in such jumps and to see it soar by many percent within a few weeks."

This confirmed his stance in a Reuters interview last month when he also said interest rates may rise somewhat less or later than previously thought and that the crown's rise was on the verge of being "totally crazy" [ID:nL11602090].

Analysts said Tuma's words were likely to reinforce market expectations that any further rate hike -- after a total 75 basis points between October 2005 and September 2006 -- was likely to be delayed for several months.

"They (CNB) will be waiting for the crown to stabilise ... Consumption has been on the rise, and once the crown calms down, they will have to do the tightening work themselves and raise interest rates," said David Navratil at Ceska Sporitelna.

He forecast a 25 basis point interest rate hike in April.

[PRAGUE/Reuters/Finance.cz]