Inflation on track for euro

SLOVAKIA started meeting the most feared criteria for adopting the European Union currency in August, when the country's inflation dipped thanks to cheaper clothing and food.

EU-harmonised inflation reached 1.2 percent year-on-year in August, which was enough to push the 12-month average inflation under the limit required for entering the eurozone.

Slovakia has to keep its inflation within 1.5 percentage points above the average for the three European Monetary Union countries with the lowest inflation rates.

Consumer prices fell by 0.1 percent month-

on-month in August, while core inflation swelled by 0.1 percent month-on-month. The average 12-month harmonised inflation was 2.37 percent.

Inflation is one of the Maastricht criteria that Slovakia will have to fulfill to be able to enter the eurozone. Other standards involve long-term interest rates, the general government deficit, the public debt, and the currency exchange rate.

Slovakia's inflation rate was one of the lowest in the EU-27 in August, said Juraj Valachy, an analyst with Tatra Banka.

"The optimistic inflation outlook we had at the beginning of 2007 has materialised and the August figure shows us that Slovakia is meeting the Maastricht inflation criterion," he told The Slovak Spectator.

The record low HICP (Harmonised Index of Consumer Prices) is a result of low fuel prices, a small increase in regulated energy prices in January 2007, and a strong appreciation of the Slovak currency, market watchers said.

This is a unique combination that will shortly fade, and the growth rate will gradually rise to levels around two percent, according to Valachy.

If Slovakia's performance is assessed in March 2008, Valachy expects the 12-month inflation average to be around 1.6 percent in that period, while the expected value of the Maastricht inflation criterion should be 2.6 percent.

"Slovakia has a comfortable safe margin for unexpected price shocks," Valachy said.

Mária Valachyová, a Slovenská Sporiteľňa analyst, also expects the country to meet the inflation criterion until the spring of 2008, though she said inflation might swell mildly at the end of the year.

"Going ahead, we expect a mild growth of the inflation rate to 1.5 percent by the year-end," Valachyová told The Slovak Spectator. "That should be still enough to meet Maastricht inflation criterion.

"We expect the 12-month HICP average to be at 1.7 percent at the time of evaluation - with the evaluation period being most likely scheduled between April 2007 and March 2008 - which should be around one percentage point below the reference limit."

Analysts agree that sustaining the lower inflation rate will continue to present challenges for Slovakia.

However, they remain optimistic about the prospect of keeping it below three percent.

"Taking into account (Slovakia's attempt to economically) catch up with the old EU15, we think Slovak inflation could gradually accelerate to three to four percent year-on-year in the upcoming years," Eduard Hagara, a research analyst with the ING Bank, told The Slovak Spectator. "However, inflation could still be below 3.0 percent in 2009, according to our estimates."

Earlier this year, the European Central Bank reportedly stated that Slovakia might have difficulty sustaining the lower inflation rate because it is currently supported by a combination of lower energy prices, strong currency and government pressure on energy companies' profit margins, according to an ECB memo to the International Monetary Fund that the Reuters newswire released on June 26.

The National Bank of Slovakia and the Finance Ministry have rejected the inflation-related concerns and dismissed the memo as not being a relevant official document.

"Official reports and officially-released data are the only ones that matter for the Finance Ministry," ministry spokesman Miroslav Šmál told The Slovak Spectator. "The current development of public finances does not imply that meeting the Maastricht criteria and adopting the euro in January 1, 2009 might be endangered."

The European Union locked the gates of the eurozone in front of Lithuania after the country had deviated from the required inflation criteria by 0.1 percentage points.

With files from Marta Ďurianová

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