UPDATE 1-Czech CPI ticks up but rates seen on hold near-term

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By Marek Petrus

Czech inflation rose further in December but held well below the tolerance band of the central bank (CNB), reinforcing market expectations of a pause in policy tightening in the next few months.

The reading, and a better than expected trade surplus also released on Tuesday, pointed to healthy economic growth and scant price pressures in the European Union member country.

The consumer price index (CPI), the broad gauge of inflation, rose 0.2 percent month-on-month and 1.7 percent year-on-year, a touch faster than the 1.6 percent consensus forecast due to higher food costs.

Markets showed limited reaction to the uptick because the annual rate remains well below the central bank's tolerance range of one percentage point either side of 3 percent.

"There is nothing to signal that an interest rate increase by the central bank should come before the end of the first quarter," said Ales Michl, analyst at Raiffeisenbank in Prague.

The CNB has held its key rate at 2.50 percent, the lowest level in the EU and one full percentage point below the euro zone equivalent, after 75 basis points worth of hikes between October 2005 and September 2006.

Rising exports and reviving consumer spending have helped to create jobs and sustain Czech growth of 6 percent last year, part of an economic boom across central Europe.

The trade balance improved for the fourth month running in November, posting a 6.43 billion crown ($303.2 million) surplus, above the most optimistic market forecast.

A seasonal rise in the jobless rate to 7.7 percent of the workforce in December from 7.3 percent a month earlier still left unemployment at historically low levels, analysts said.

RATE HIKES NOT IMMINENT BUT IN STORE

Subdued inflation, a sharp rise in the crown to record highs in late 2006 and policymakers' recent dovish comments have led markets to believe that no further rate rise is likely soon.

"Given the crown's (strong) exchange rate and its tightening effect, a rate hike may not even come in April as we had expected," said David Marek, chief analyst at Patria Finance.

The crown has slid half a percent from record highs reached in December but at Monday's levels around 27.600 to the euro was some 2.5 percent firmer versus the CNB's forecast.

The CNB said in a statement December price growth lagged its forecast from October by 0.7-0.8 percentage points, showing mild inflationary pressures which had been offset by the firm crown.

The bank is widely expected to cut its inflation forecast at the January 25 meeting but keep expectations of another hike later this year alive, to track a forecast euro zone rate rise.

"But at the moment the CNB is still more concerned about the strengthening currency, so we do not think that rate hikes are imminent," said Istvan Zsoldos, economist at Goldman Sachs.

For INSTANT VIEWS on December inflation and November trade data, double click on [ID:nL09302249] [ID:nL09174055]))

((Editing by Ruth Pitchford; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; +420 224 190 477))

Keywords: CZECH ECONOMY/

[PRAGUE/Reuters/Finance.cz]