Friday, August 10, 2007

Slovak Inflation

From Bloomberg today:

Slovak Inflation Rate Fell to 2.3 Percent in July

By Radoslav Tomek

Aug. 10 (Bloomberg) -- Slovakia's annual inflation rate fell to 2.3 percent in July, bringing the nation closer to meeting its goal of adopting the euro, as a decline in food prices joined the koruna in driving prices down.

Inflation slowed from 2.5 percent in the previous month, the Slovak Statistical Office said in an e-mailed statement from Bratislava, Slovakia, today. Consumer prices were unchanged from June. A median forecast of 13 economists surveyed by Bloomberg expected a monthly increase of 0.1 percent and an annual rate of 2.4 percent.

The koruna's 12 percent advance against the euro in the past year is helping Slovakia curb price growth so it can adopt the euro in 2009 as planned. The inflation rate will probably be low enough for the country to be the next former communist nation after Slovenia to make the switch, economists said.

``The bigger-than-expected drop in food prices brought a positive surprise,'' said Maria Valachyova, an economist at Slovenska Sporitelna AS in Bratislava. ``The outlook for inflation remains favorable and Slovakia shouldn't have a problem to meet the criterion'' for the euro adoption.

The koruna was trading at 33.55 against the euro at 9:50 p.m. in Bratislava, down from yesterday's close of 33.50. The currency has pared some gains since it rose to a record 32.69 against the euro on March 19.

Food Prices

Food prices, which have the biggest weight in the inflation basket, fell 0.6 percent in the month. Prices of shoes, clothing and furniture also declined. Rising the most were health-care prices, which were up 0.3 percent in the month.

July core consumer prices, which exclude the effect of changes to regulated prices and indirect taxes, fell a monthly 0.1 percent while the annual rate fell to 2.4 percent from 2.5 percent.

Slovakia must meet tests on inflation, state spending and the level of interest rates in order to switch currencies.

It needs to slow the 12-month inflation rate to within the average of the three countries with the slowest price growth plus 1.5 percentage points. That rate for Slovakia in June was 3 percent, above the EU's limit of 2.8 percent for that month.

The central bank expects inflation to slow to 1.9 percent by December after peaking at 5.1 percent in August 2006. Still, monetary policy must remain ``very cautious,'' board member Peter Sevcovic said after the bank left its benchmark rate unchanged for the third month on July 31.

Given the positive inflation outlook, the central bank this year trimmed its benchmark two-week interest rate by a half-point to 4.25 percent. The cuts followed four increases in 2005 to ward off inflation.

Energy Prices

``We don't see any significant demand-driven pressure on prices,'' said Marek Gabris, an economist at Ceskoslovenska Obchodni Banka AS in Bratislava. ``The inflation criterion shall be met with a large enough buffer, but a lot will depend on by how the regulated energy prices will rise.''

Slovakia will file its application for the switchover in the first half next year. In addition to squeezing the rate below the limit, it must show the drop in inflation was sustainable. Economists said Slovak inflation is set to accelerate from the next year, as the country will continue catching up with its richer peers at times when the koruna's gains won't be repeated.

This year, policy makers will probably keep the benchmark rate at 4.25 percent, a quarter-point above the similar benchmark in the euro-region.

``Today's release won't have an impact on monetary policy,'' Valachyova said. ``We expect an increase in Slovak rates next year, in line with the European Central Bank's action.''

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