* MPC cites increased inflation risks, more hikes seen
* Bank eyes household expectations, second-round effects
* Zloty, bond yields rise after Belka comments
(Adds quotes, market reaction, background)
By Marcin Goettig and Pawel Bernat
WARSAW, April 5 (Reuters) - Poland's central bank raised borrowing costs for the second time this year on Tuesday citing increased inflation risks and signalled more rate rises lay ahead.
The bank's 10-strong Monetary Policy Council (MPC) increased the key interest rate by a quarter of a percentage point to 4.0 percent, as expected, giving a boost to the zloty currency.
"In the assessment of the Council, continuing economic recovery in Poland and further employment growth may gradually increase wage and inflationary pressures in the medium term," the bank said in a statement.
"At the same time, a rise in inflation expectations combined with a surge in commodity prices across the world create the risk that heightened inflation will persist."
Inflation stood at 3.6 percent in February on an annual basis, unchanged from the previous month, but well above the central bank's 2.5 percent target.
Recent data showed Polish households' expectations for inflation over the next 12 months had risen to 4.6 percent in March, up from 3.2 percent in the previous month, raising fears of greater wage pressures.
Central bank governor Marek Belka signalled that further monetary tightening lay ahead after January's and now April's hikes of 25 basis points each.
"I can't say that we are nearing the end of the tightening cycle," Belka told a news conference, adding he did not think the bank had acted too late in raising rates.
ZLOTY, BOND YIELDS FIRM
The zloty rose to around 4.004 to the euro and bond yields at the short end of the curve also firmed after Belka's relatively hawkish tone.
"We expect another 25 basis point rate hike in July and one more in the autumn," said Grzegorz Ogonek, an economist at ING Bank, after the news conference.
Twenty-three of 29 analysts polled by Reuters had forecast Tuesday's interest rate increase.
Poland's economy is expected to grow by about 4.4 percent in the first quarter of this year, the same pace as in the last three months of 2010, the bank's statement said.
Earlier, a source close to the government told Reuters the figure could stand at around 4 percent on an annual basis.
But Belka said the majority view on the MPC was that the pace of growth in itself did not mean accelerating inflation.
At this month's sitting, the MPC had to take into account the likelihood that the European Central Bank will raise euro zone interest rates on Thursday, a move that would have left the zloty looking vulnerable in the absence of a Polish rate rise.
"The signals coming from the ECB and its decision on Thursday will be important for the MPC," said Maciej Reluga, chief economist at Bank Zachodni WBK, adding that he did not expect another rate hike at the next Polish sitting in May.
"We expect two more interest rate rises this year," he said. (Additional reporting by Dagmara Leszkowicz, writing by Gareth Jones, editing by Ron Askew)