By Petra Vodstrcilova
PRAGUE, June 17 (Reuters) - Czech inflation risks have risen
over the past few weeks but the firm crown currency will slow
the economy and provides a strong argument for keeping rates
flat, Czech central bank board member Vladimir Tomsik said.
The central bank (CNB) has raised interest rates five times
in the past year, but has held the key rate steady at 3.75
percent since February while regional peers Poland, Hungary and
Romania have tightened policy further.
An increasing number of analysts believe global inflation
risks from oil and food prices may prompt another Czech hike.
Tomsik stopped short of fuelling those expectations in an
interview with Reuters on Monday, saying the currency impact
would be significant and it was hard to say whether rates needed
to rise.
"I can see an upside shift in inflationary risks due to wage
growth, developments abroad and a rise in regulated prices, but
on the other hand the crown is such a strong factor that I
expect it to impact the real economy," Tomsik said.
"I am not able to decide now whether the time for raising
interest rates has already come."
Despite a spike in price growth, the Czech benchmark rate
now stands 25 basis points below the euro zone's and well below
Poland's 5.75 percent and Hungary's 8.25 percent.
Central banks in both Poland and Hungary, as well as
Romania, are expected to hike rates in the coming weeks.
The money market indicates investors expect a similar move
from Prague, aggressively pricing in as much as 75 basis points
in hikes this year, forward rate agreements <CZKFRA> show. Czech
policymakers will meet to discuss rates on June 26.
Central bank Vice-Governor Miroslav Singer said in a
newspaper interview last week that the margin of arguments in
favour of stable rates had been very thin [].
CURRENCY STRENGTH
But Tomsik said the crown made a difference. The unit has
gained 15.2 percent against the euro over the past year,
climbing to all-time highs. It traded at 24.190 at 1100 GMT on
Tuesday, off a record 24.14 seen last week.
The currency level is particularly important for the small
central European economy because foreign trade accounts for a
high proportion of economic activity, giving currency swings a
greater impact on domestic prices than in some bigger economies
such as Poland.
Tomsik said he assumed exchange rate changes were taking
longer to show up in the real economy than in the past due to
exporters hedging against appreciation.
"We do not target the exchange rate, but when I see the
annual 15 percent appreciation of the crown, then it is a strong
factor for me to consider keeping rates where they are, even if
I cannot yet see the impact on gross domestic product (GDP) or
export data," Tomsik said.
Consumer inflation is likely to rise temporarily to levels
around 7 percent from May's 6.8 percent on the back of a July
natural gas price hike and the delayed impact of a January
consumer tax hike on cigarettes, he said.
"(But) I still insist that inflation on the horizon as of
the next year will move toward the inflation target," he said.
The CNB targets headline inflation at 3 percent, with a
tolerance band of 1 percentage point on either side.
Revised growth numbers show the economy peaked not in the
fourth quarter of 2007, as previously believed, but already in
the first quarter last year, which may indicate a decline of
price pressures from the real economy, Tomsik said.
Data from around central Europe show former communist states
have began to feel the pinch of weaker west European growth.
The Czech annual economic growth rate ebbed to 5.3 percent
year-on-year in the first quarter this year from 6.3 percent in
the final three months of 2007 as government reforms and surging
inflation bit into consumer spending.
(Editing by Ruth Pitchford)
