UPDATE 2-Czech cbank holds rates flat for 5th month running

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By Marek Petrus

PRAGUE, March 1 (Reuters) - Czech central bank (CNB) policymakers held interest rates steady for the fifth month running on Thursday and reinforced market impressions that benign price pressures require no urgent policy tightening.

All seven members of the policy board voted to hold the key two-week repo rate at 2.50 percent, the lowest level in the European Union and a record 100 basis points below the euro zone equivalent.

The CNB has paused since tightening policy by a total of 75 basis points between October 2005 and September 2006 to prevent robust growth from sparking a revival of inflation.

"The significant prevailing view on the board was that the risks (to the inflation outlook) were balanced," Governor Zdenek Tuma told a news conference, a signal that board members were largely in favour of holding policy steady in the near future.

But he did put a modestly hawkish spin on his statement by adding one view on the board -- shared by an unspecified number of members -- cautioned against the risk of higher inflation due to solid growth both at home and abroad and a weaker crown.

Tuma said the crown's drop so far this year had left the currency weaker than the CNB had forecast, which could also fan inflation concerns in the small and very open Czech economy.

In January, the rise in consumer prices slid further below the CNB's tolerance range of one percentage point either side of a 3 percent inflation goal.

Annual inflation dropped to 1.3 percent, matching a near 1-1/2-year trough reached in October 2006 and leading investors to take risks of an interest rate hike almost completely out of the picture for the first half of 2007.

"The CNB should not hasten to raise rates," said Petr Dufek, analyst at CSOB bank in Prague.

"We predict that room for a rate hike may occur no sooner than the early second half of the year. Inflation will remain below the CNB's target for most of the year, and will probably exceed the target as late as the end of the year," he added.

LOW RATES HAMPER CROWN

A rebound in household spending, a consumer credit boom and the prospect of sustained economic growth at around the 5 percent trend rate have all led investors to stick to the outlook for a gradual, albeit moderate, tightening later on.

A delay in another Czech rate hike means the already record discount versus higher benchmark euro zone rates will widen further to 125 basis points if the European Central Bank hikes its rates to 3.75 percent as markets widely expect on March 8.

The low cost of money has led many investors to prefer to sell the crown to fund trades in high-yielding emerging markets assets, with the goal of capturing the interest rate spread.

The crown firmed a third of a percent to a one-week high around 28.14 per euro on Thursday, paring its losses since hitting lifetime highs in late December to 2.6 percent.

This week's emerging markets weakness helped to bolster the crown as it led some market players to unwind yield-dependent selling crown positions, but some analysts said the yawning rate gap would keep weighing on the Czech currency.

"We think the arguments for holding crowns remain limited in the medium term ... given slowing growth, weakening balance-of-payments dynamics and the widening of the rate spread with the ECB," said Olivier Desbarres at Credit Suisse in London. ((Editing by Gerrard Raven; 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/