(Writes through with analyst, CNB policymakers quotes)
By Marek Petrus
PRAGUE, Nov 8 (Reuters) - Czech inflation leapt to its highest annual rate in nearly six years at 4.0 percent in October as food price growth surpassed expectations, leading investors to shorten the odds of an interest rate increase this month.
Unemployment declined to a new decade low in October, extending this year's fall that has fed wage-inflation concerns at the central bank (CNB) as robust output growth in the economy dries up the poll of available workers.
The consumer price index (CPI), a broad gauge of inflation targeted by policymakers, rose 0.6 percent in October from September, the statistical bureau reported on Thursday.
That was above the 0.4 percent forecast in a Reuters poll due to a sharper-than-expected 2.3 percent rise in food prices.
Annual inflation <CZCPIY=ECI> surged to 4.0 percent from 2.8 percent in September for the highest rate since January 2002, above the consensus forecast of 3.8 percent and at the top end of the CNB's forecast of 3.6-4.0 percent.
"I think this number seals an interest rate increase this month," said Pavel Sobisek, economist at UniCredit Global Research.
The CNB held its key repo rate at a five-year high of 3.25 percent for a second consecutive month in October in the face of a record strong crown, but made clear that tighter policy was needed soon to contain resurgent inflation.
The crown has rallied 7 percent against the euro <EURCZK=> since hitting this year's lows in early July and is up 20 percent over a year ago versus the broadly weak dollar <CZK=>, offsetting some pressures on prices in the open Czech economy.
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However, analysts said the tight labour market, projections of a further rise in inflation above 5 percent early next year due to a tax hike and buoyant consumer spending would likely force the CNB's hand into tightening despite the firm crown.
End-October unemployment fell to a decade low of 5.8 percent of the workforce <CZUNR=ECI>, below the market forecast of 5.9 percent after the previous low of 6.2 percent in September.
"We expect the CNB will have to hike the base rate again on November 29 to support the credibility of its commitment to maintain low-inflationary environment at the time of negotiations on wage rise for next year," said Miroslav Plojhar, economist at JP Morgan in London.
Short-term forward-looking money market rates <CZKFRA> jumped by up to 15 basis points, reflecting an increased probability of a rate hike at policymaker's next rate-setting meeting on November 29 and beyond.
Economic growth is expected to top 6 percent this year for the third year running, with household consumption becoming a main growth driver and an inflation concern. Plojhar forecast further interest rate rises to 4 percent in the middle of 2008.
The crown firmed slightly to 26.880 per euro <0#EURCZK=> by 1040 GMT from 26.950 just before the release. Medium- and long-term government debt yields <0#CZBMK=> rose by about 1-3 basis points across the board. ((prague.newsroom@reuters.com; +420 224 190 477; Reuters Messaging: marek.petrus.reuters.com@reuters.net))
Keywords: CZECH ECONOMY/INFLATION
