(Adds cbanker quotes, updates crown)
By Marek Petrus
PRAGUE, Nov 29 (Reuters) - The Czech central bank (CNB) raised interest rates by 25 basis points on Thursday, choosing to clamp down on resurgent inflation instead of allowing a strong crown currency to do the job for it.
Policymakers bumped up the main two-week repo rate to 3.50 percent <CZCBIR=ECI>, bringing it to its highest level in nearly 5-1/2-years. The news, albeit not entirely unexpected by the market, boosted the crown to a lifetime high against the euro.
The seventh quarter-point rate rise since benchmark credit costs rose from an all-time low of 1.75 percent in October 2005 followed a similar step by neighbouring Poland on Wednesday.
Price pressures have been building in central Europe's booming economies, and the threat of a spillover of rising prices for food and energy into higher inflation and wage expectations spurred central bankers into action.
CNB Governor Zdenek Tuma said after the meeting that it was a close call -- the board voted 5-2 to raise rates -- but in the end a sharp increase in inflation tipped the scales.
"The expectation that this decision will not be easy was a correct one ... There were very strong arguments for both leaving (rates) unchanged and raising them," Tuma said.
"What led us to this (decision)? I point out the current forecast ... This means a sharp increase in inflation."
Financial markets had been unsure about the Czech decision, with nine of the 17 CNB watchers surveyed by Reuters last week predicting a quarter-point rise against eight forecasting no change []. Those not expecting a hike thought the strong crown would outweigh the inflation spike.
"With its prompt action, the CNB clearly showed its resolve to fight inflation," said David Marek, Chief Economist at Patria Finance in Prague.
The CNB decision narrowed the discount versus the euro zone equivalent to 50 basis points but still left the main Czech rate at the lowest level in the European Union.
6 PCT INFLATION
The Czech economy has been growing at about 6 percent for the third year and a Reuters poll on Thursday forecast November inflation at a six-year high of 4.5 percent, versus the CNB's 3 percent target with a plus/minus 1 percent comfort zone.
The outlook is for inflation to leap early next year towards 6 percent, due mainly to a sales tax rise and regulated price hikes, factors which monetary policy can do nothing to contain.
Tuma said risks to the bank's most recent inflation forecast were skewed in both directions, and noted the next move could even be an interest rate cut, depending on the crown.
"It can happen that we will be weighing a further rate increase at one of the upcoming meeting, or rates may stay at the current level for some time ... or I can imagine that the next move (in rates) may even be downward," he said.
The crown has rallied 9 percent versus the euro since this year's lows in early July, as investors unwound risky bets in high-yield assets funded out of low-yield crowns and exporters pre-hedged their receipts for next year.
The crown scaled a record peak of 26.250 per euro <0#EURCZK=> to firm 0.8 percent from just before the rate announcement. It was at 26.280 at 1530 GMT.
Bond yields and money market rates inched mostly higher. (Editing by Alan Crosby and Ruth Pitchford) ((prague.newsroom@reuters.com; +420 224 190 477; Reuters Messaging: marek.petrus.reuters.com@reuters.net))
Keywords: CZECH RATES/
