UPDATE 2-Low Czech Jan CPI points to steady rates near-term

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By Marek Petrus

Czech consumer inflation ebbed unexpectedly in January to run at one of the slowest rates in the European Union, leading investors to abandon expectations of an interest rate rise before the second half of the year.

The consumer price index (CPI), the broad gauge of inflation targeted by the central bank (CNB), rose 1.0 percent month-on-month , according to data on Wednesday.

It lagged the 1.6 percent median forecast in a Reuters poll of analysts, as the one-off boost from a raft of regulated price hikes and tobacco tax rise proved weaker than analysts expected.

That slashed annual price growth to 1.3 percent from 1.7 percent in December , back into line with a nearly 1-1/2-year through in price growth reached in October 2006.

The outcome -- first after a re-weighting of the CPI basket which heightened uncertainty over the release -- wrongfooted the market's consensus forecast of a quickening to 1.9 percent.

"The lower-than-expected January number has lowered the inflation profile for the rest of the year in a meaningful way," said Nora Szentivanyi, economist at JPMorgan in London.

The EU-harmonised index (HICP) slowed to a preliminary 1.4 percent, one of the lowest levels across the 27-member EU.

The benign inflation numbers sparked a debt market rally and weakened the crown, boding well for expectations of protracted stability in interest rates following 75 basis points worth of tightening between October 2005 and September 2006.

"We still expect headline inflation to increase later in the year, but there is a significant risk of delay to the rate hike schedule," said Istvan Zsoldos, economist at Goldman Sachs.

Debt markets cut the chances of a quarter of a percentage point rate rise by June to some 70 percent from a near certainty before the release, according to a Reuters computed yield curve.

The crown lost about quarter of a percent to 28.265 per euro by 1320 GMT. Analysts said only a sharp drop in the crown, which would quickly filter into consumer price rises in the very open economy, could hasten central bank tightening.

RATE CUT TALK?

Inflation undershot the CNB's prediction of 1.4-1.5 percent, sliding further below its tolerance range of one percentage point either side of a 3 percent goal.

"The present inflation pressures from the real economy remain modest, and furthermore have so far been compensated for by the past firming in the crown," said Tomas Holub, head of the CNB's monetary and statistics department, said in a statement.

A number of analysts said the average CPI rate was likely to remain stuck below target through the year-end.

Last month, policymakers held the key rate at 2.50 percent, the lowest level in the EU, and are unlikely to rush into policy tightening despite healthy economic growth confirmed by a 9.7 percent jump in last year's industrial output data on Wednesday.

Minutes from the January CNB meeting surprisingly showed some board members did not even rule out a future rate cut.

"Look for a discussion of CNB rate cuts to intensify," said Martin Blum, head of emerging markets research at UniCredit Markets & Investment Banking in Vienna.

"Our point being the CNB is perhaps more keenly aware of the risks of deflation than any other EU central bank," he added, pointing out that the annual CPI remained in the negative territory for much of 2003.

((For INSTANT VIEW of inflation data, double click on the code in brackets: [ID:nL14928952]))

((Editing by David Christian-Edwards; 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 ECONOMY/

[PRAGUE/Reuters/Finance.cz]