By Jan Lopatka
PRAGUE, Oct 8 (Reuters) - Czech annual inflation accelerated to a 13-month high in line with forecasts in September, keeping alive the possibility of further interest rate hikes by the end of the year.
The Czech Statistical Bureau (CSU) said on Monday consumer prices dropped 0.3 percent month-on-month, but the year-on-year index jumped to 2.8 percent from 2.4 percent in August.
The market had expected a 0.4 percent monthly fall and 2.8 percent annual rise, according to a Reuters poll.
The monthly drop came on the back of a seasonal slide in the prices of packaged holidays. But year-on-year, holiday prices edged up.
The markets showed no visible reaction to the data, with the crown trading flat around 27.535 to the euro <EURCZK=>.
Analysts agreed that while there was no big surprise in the data, inflation in the fast-growing economy was bound to jump in the coming months due to base effects, tax hikes planned for January, and planned price deregulations.
Jiri Skop, an analyst at Komercni Banka, said that monetary-policy relevant inflation, which strips off the impact of indirect tax changes, has crept back up toward the central bank's July outlook from lower levels in the past months.
"We still keep our outlook for two interest rate rises, of 25 basis points each, by the end of the year toward 3.75 percent," said Skop, who is on the hawkish side among analysts.
The bank has hiked rates three times so far this year by a combined 75 basis points, to a five-year high of 3.25 percent as inflation crept up in the economy growing at a 6 percent pace annually.
FIRM CROWN HOLDS RATES IN CHECK
However, a return of the crown to record highs in the past months, sparked by unwinding of global carry trades, as well as softer interest rate environment in the euro zone has dampened the outlook for future rate increases.
"The CNB (central bank) had forecast 2.9 percent (annual inflation), so we are still hovering below its forecast, and given how much the crown has firmed, interest rates are most likely to hold steady until the year-end," said David Marek, chief analyst at Patria Finance.
The money market was pricing in one rate hike by the end of the year, in about November, a dealer said.
Central bank chief Zdenek Tuma chose a slightly softer tone after the central bank left interest rates flat last month.
He said the next quarterly inflation forecast due out on October 25 may possibly indicate slightly lower interest rate growth than the current one if the bank deems that the seep-through of indirect tax hikes into prices is slower than previously thought.
A separate set of data from the Labour Ministry showed unemployment dropped to a new decade low of 6.2 percent in September as the fast-growing economy created new jobs, to the point of raising fears of a labour market squeeze.
The foreign trade balance showed a 0.6 billion crown ($30.74 million) deficit in August, slightly worse than a 1.1 billion surplus expected by analysts.
However, the result did not change the picture of an improving trade balance, whose surplus reached 55.1 billion crowns in the year-to-date, double the figure for January-August 2006. ((Reporting by Jan Lopatka, editing by Gerrard Raven; prague.newsroom@reuters.com; Reuters Messaging: jan.lopatka.reuters.com@reuters.net; +420-224 190 474)) ($1=19.52 Czech Crown)
Keywords: CZECH INFLATION/
