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Czech cbanker says food costs key in rate decision

The Czech central bank may raise interest rates further if world food prices keep growing, bank board member Robert Holman said on Friday, but he added he did not see significant signs of secondary impacts from cost shocks.

“If world food prices grow, then it will filter down to us at least partially, so that could then be another argument (for a rate hike)," Holman, who generally favors stable rate policy, told journalists on the sidelines of an economic seminar. Czech inflation soared to a nine-year high of 7.5% year-on-year in January, partially due to tax changes, regulated price increases, and energy and food price rises. “This is key information for us because food prices are after all very important argument for filtering into inflation expectations, mainly wage talks," he said, adding he needed to see fresh data before making a call on policy. Holman said he did not see any big secondary impact of the cost shocks and was optimistic so far about the seep-through into inflation expectations. “A lot will depend on the unions, on wage talks, I would for the time being be optimistic about the seep-through into inflation expectations, we do not se any big risk," he said.

Economists say that if people worry that inflation may not come down fast, workers would demand large wage hikes, which would be a sign for further interest rate tightening. Inflation dropped to 7.1% in March and the central bank insist t will fall to its target of 3%, +/- 1 percentage point, by the beginning of 2009.

In a Reuters poll this week, all 15 analysts surveyed said they expected the Czech central bank (CNB) to keep the main two week repo rate unchanged at its May 7 meeting at a six-year high of 3.75%. Most saw the CNB staying put for the rest of 2008 due to the strong koruna and slowing global growth, but four still saw room for a 25 basis point rate hike in June. (Reuters)