UPDATE 3-Czech c.bank holds rates, doveish in short-term

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By Jan Lopatka

The Czech central bank (CNB) left interest rates on hold at its monthly board meeting on Thursday, and gave the market a clear signal that policy in the European Union member was unlikely to be tightened in the coming months.

The decision to leave the key two-week repo rate at 2.50 percent, the lowest in the European Union, was in line with analysts' forecasts that subdued inflation and a strong crown would allow the CNB to hold its policy unchanged.

The unanimous decision by the CNB board was also in line with Hungary's vote on Monday to keep rates flat. Policymakers in Slovakia and Poland are also expected to hold fire next week.

In a quarterly update of its inflation outlook, the key driver for monetary policy decisions, the CNB said it sees price pressures in the real economy falling in 2007, adding to the doveish outlook for interest rates.

"This (January) forecast is consistent, roughly with stability of interest rates in the nearest period, the nearest months...in the longer term rates should gradually rise," Governor Zdenek Tuma told a news conference.

Financial markets have already been scaling back expectations of a Czech credit tightening after 75 basis points worth of hikes between October 2005 and September 2006.

All 20 economists in a Reuters survey last week predicted the bank would stay on hold for now and 17 did not see any rise until at least the second quarter.

The Czech repo rate, at 2.5 percent, is a full percentage point below the euro zone equivalent, as the strong crown helps keep inflation at bay.

Tuma said the crown's development was an uncertainty in forecasting inflation, as were lower energy prices and the outlook for the economy abroad.

"Arguments can be made in both directions. The exchange rates (in the region) have corrected, and we will see how the situation develops further," he said.

The crown showed no reaction to the decision, trading at 28.150 to the euro at 1515 GMT, unchanged from just ahead of the announcement and at its weakest level since mid-November.

The crown has shed 2 percent from lifetime highs against both the euro and the U.S. dollar , seen in late December and early January.

Tuma said the crown was now slightly weaker than assumed in the January prediction.

"The (rate) decision is in line with expectations. We expect a tightening of policy only after a stabilising of the crown exchange rate," said David Navratil of Ceska Sporitelna.

"By the end of the year, we expect (the two week repo rate) at 3.0 percent."

December annual inflation of 1.7 percent undershot the CNB's target, which aims at 3 percent but includes a tolerance range of one percentage point either side of that.

The CNB's January inflation forecast sees price growth at 2.4-3.8 percent in December 2007, and 2.8-4.2 percent in June 2008. GDP growth is forecast at 4.4-6.2 percent in the new outlook, little changed from a prediction of 4.4-6.6 percent in the October outlook.

[PRAGUE/Reuters/Finance.cz]