By Jan Lopatka (PRAGUE, Reuters, 21.8.2001)

The Czech economy is not overheating and does not need interest rates hikes now, central bank (CNB) board member Jan Frait said on Tuesday.
"For me personally the latest data logically speak in favour of maintaining the current monetary policy setting," Frait, believed to be on the dovish side of the seven-member CNB board, told Reuters in an interview.
However, he added he could change his opinion if presented convincing analysis at the next board meeting on August 30. The bank last month raised rates for the first time in three years.
"We do not have signals that there is any macroeconomic overheating and it appears that certain such signs would be slowed down by the drop in world growth," Frait said.
The Czech economy has been powering ahead thanks to an investment wave and recovering domestic demand, although analysts increasingly fear the impact of slowdown in the west.
A slight majority of analysts polled by Reuters expect the bank to tighten rates at the meeting, by 25 basis points or less likely by 50 to counter fears of demand-led pressures. The unanimously agreed July hike took the repo rate to 5.25 percent. Some market players see the July increase as the first step in a series of small moves which would bring the repo to 5.50 or 5.75 percent by the end of the year. The market has largely priced in a 25 bps hike this month.
Frait said weakish June retail sales and industrial output, up 2.2 and 3.7 percent year-on-year respectively, and the euro's rise versus the dollar spoke against hikes.
He noted that the July rate increase was a "small correction" rather than tightening policy, which he said has been accommodative and this approach remains appropriate.
Only hikes in the range of full percentage points would mean a real tightening of policy, and that is not needed, he said.

INFLATION SEEN RECEDING

Inflation has grown over the past months to a surprisingly high 5.9 percent in July, the highest level since end of 1998, mainly on the back of food, oil and holiday tour prices.
But Frait said the bank expected it to fall back within its target corridor in the second half of 2002, which is the relevant period for current decisions on monetary policy.
The target sees inflation falling steadily from 3-5 percent in January 2002 to 2-4 percent in 2005, and current central bank prognosis sees CPI at 3.5-4.9 percent at end-2002.
Czech rates are low compared with other transitional economies - in Poland the key rate is 15.5 percent while inflation is lower than in the Czech Republic.
Frait criticised the growing public sector deficit for causing a "sub-optimal" mix of policies, echoing frequent central bank calls for fiscal reform. Another risk is fear that wages could keep growing despite slowing output, he said.

STRONGER EURO/DOLLAR WELCOME

The bank raised its 2001 economic growth forecast to 3.8 percent from 2.3-3.3 percent last month but Frait said there were some signs of faltering in some sectors.
"Some segments of the economy are showing a decline of the growth pace...including those we would like to see as leaders, such as manufacturing industry," he said. "There are implications from falling growth in the world economy."
He lauded the strengthening of the euro, which makes dollar-priced oil and gas cheaper, cutting imported inflation. The crown has gained eight percent against the dollar and shed 0.8 percent against the euro since early July. A weaker crown versus the euro helps Czech exports which mainly go to Germany and other eurozone countries. Frait said the central bank was still opposed to the government's plans toissue a 500 million to one billion euro eurobond this year, because of its expected upward pressure on the crown. He said he believed the domestic market has enough depth to absorb government borrowing for the time being.