By Marketa Fiserova (Bloomberg, 21.7.2004)

July 21 (Bloomberg) -- Czech inflation probably won't pick up as fast as the central bank predicted in April, Czech National Bank board member Jan Frait said, suggesting borrowing costs by year-end won't be raised as much as policy makers had expected.

"From a long-term perspective, there are no inflation pressures in the Czech Republic," said Frait, 38, in an interview in Prague. "We really live in a low-inflation environment, and relatively low interest rates are consistent with it."

The central bank in April said the inflation rate would rise to 4 percent this year from an average 0.1 percent in 2003 after the government raised some taxes following European Union entry in May. The bank, which on June 24 raised its main interest rate for the first time in three years to 2.25 percent, will release its new forecast next week. Central banker Pavel Racocha said this month that the rate may rise by a percentage point in a year.

The Czech Republic, which has one of the lowest inflation rates among the 10 countries that joined the EU this year, needs to keep consumer price growth in check to meet conditions for adopting the euro, which it plans to do by the end of the decade.

Since the April forecast, the central bank raised its estimate for economic growth, saying gross domestic product probably will expand about 4 percent this year and next, up from 3.1 percent in 2003. The inflation rate rose to 2.9 percent in June, its highest since April 2002.

Czech policy makers have signaled more increases will follow, prompting economists to predict rates will rise by another 50 basis points by year's end. A basis point is 0.01 of a percentage point.

Monetary Policy Meeting

The central bank meets on July 29 to vote on interest rates under its new inflation and gross domestic product growth forecast.

A pickup in industrial production, which soared an annual 12.7 percent in May, the third-straight month of double-digit growth, as companies such as Witte Nejdek spol. S.r.o., which makes car locks, and Tanex Plasty AS, which makes car head rests, raise output amid growing demand from the EU, the U.S. and Asia. Productivity in industry increased 17.3 percent, with the average inflation-adjusted wage adding 2.4 percent.

That is boosting the Czech economy's capacity, making the economy more resistant against a demand-led pickup in inflation, Frait said.

"I expect the new forecast will suggest smaller inflation pressures than in April and thus a smaller increase in rates that would be consistent," Frait said. "There are positive trends at least in a part of the economy," which could ensure "that accelerated growth doesn't necessarily have to bolster any big inflation pressures."

The koruna rose to a 19-month high against the euro on Friday on expectations the central bank will raise interest rates again as early as at July 29.

The so-called neutral level of interest rates, which would neither support nor stifle economic growth, is below 4 percent in the Czech Republic, according to an estimate by Frait, who has been on the seven-member monetary policy board since 2000.