September 29, 2016 / 2:27 PM / a year ago

UPDATE 1-Czech central bank narrowing in on crown cap exit date around mid-2017

* Moves earliest possible exit into Q2 2017 from Q1

* Still sees likelihood to scrap FX cap in mid-2107

* Governor Rusnok's news conference highlights (Adds governor, analyst, background)

By Jan Lopatka and Robert Muller

PRAGUE, Sept 29 (Reuters) - The Czech central bank on Thursday delayed the earliest possible end of its weak-crown policy until the second quarter of next year and at the same time confirmed it expected to refloat the crown in mid-2017, narrowing the corridor for the likely return to standard monetary policy tools.

The bank has kept the crown on the weak side of 27 per euro since November 2013 in order to help revice inflation.

It has repeatedly delayed exit from the policy as inflation stuck around zero. But a rise in output, employment and demand have brought removal of the exchange rate ceiling closer, triggering a bout of speculation in the currency forwards market that the bank could even move soon after the end of this year.

Timing of the exit is of paramount importance to the country's strongly export-oriented companies and to financial market players. Most analysts see the crown as undervalued and expect it to firm after it is floated though by only a few percent.

The bank sought to quash speculation of an early move on Thursday, extending its "hard" commitment to keep the policy in place at least into the second quarter of 2017. Previously, the bank said the earliest possible exit was in January next year.

But at the same time the bank retained its "soft" outlook that the cap, supported by buying over 20 billion euros in market interventions since 2013, could be removed around mid-2017.

"The risk of postponement seems to be minimal today, really the development so far is in line with our forecast and assumptions," Governor Jiri Rusnok told a news conference.

"Certainly it is out of question ... that we would move the exit back to the first quarter, that is excluded after today's meeting, everything else remains."

Rusnok said earlier this month the he saw the exit could come after the July-August holidays next year.

Asked about that option on Thursday, he said he did not want to speculate on exact timing, effectively leaving the door open to what exactly the bank saw as "mid-2017".

Analysts in a Reuters poll had expected no changes by the bank's monetary policy department in part because three out of seven members were absent.

The poll showed the market sees exit from the intervention regime in the second half of 2017, with some players expecting another delay until the end of the year.

"That will be in our view caused above all by muted economic development in the euro zone - with the impact of Brexit next year -- and slight slowdown in wage growth in the Czech Republic," Ceska Sporitelna said in a note.

The approaching end of the weak currency regime and eventual rise in interest rates from the current 0.05 percent is supported by the bank's outlook that inflation will rise above 2 percent, the midpoint of its target, in the middle of the next year.

The consumer price index rose to 0.6 percent in August from 0.5 percent in July, exactly matching the central bank's forecast. The economy grew by 2.6 percent in the second quarter and the bank expects it to accelerate to 3.0 percent next year.

The bank reiterated the crown would not strengthen sharply upon exit, due to pre-hedging by exporters, closing of long-crown positions, and more central bank interventions that would come if needed. (Additional reporting by Jason Hovet; Editing by Richard Balmforth)

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