Inflation down for second month running

ACCORDING to a European Commission forecast published in the first week of November, Slovakia will miss its January 2009 target for adopting the euro because its inflation rate will be well over the maximum allowed.

ACCORDING to a European Commission forecast published in the first week of November, Slovakia will miss its January 2009 target for adopting the euro because its inflation rate will be well over the maximum allowed.

But with inflation actually falling for the second consecutive month in October to 3.7 percent y-o-y, the Slovak central bank and local economic analysts were saying the EC forecast was itself inflated, and that Slovakia was still well-positioned to meet its euro date.

October's rate was down from 4.6 percent in September and 5.1 percent in August, and was thus substantially closer to the ceiling imposed on would-be eurozone members, which is likely to be about 2.8 percent when Slovakia is measured for euro-readiness in April 2008.

The recent decline was due to a five percent monthly drop in gas prices, as well as cheaper clothing and shoes.

Central bank governor Ivan Šramko expects an inflation rate of 2.5 percent for 2007, falling slightly in spring 2008. These figures do not take into account the fact that regulated energy prices are to grow more slowly than earlier expected; the price of natural gas, for instance, is actually to fall by three percent in January next year. Central bank board member Peter Ševčovic predicts that, as a result, the inflation rate will be up to three-tenths of a percent lower than the bank's forecast.

The stronger Slovak crown, which has appreciated by over eight percent against the euro since Slovakia entered the ERM II preparatory program for euro adoption in November last year, is also expected to cut inflation by making imports cheaper.

According to the EC, however, inflation in Slovakia will be 3.4 percent in 2007. The European Union has a strict-but-fair policy on judging euro entrants, meaning that the Maastricht economic criteria for entry must be met fully with no "margin of error".

"If the crown continues to strengthen next year as well, and food doesn't go up too much, the inflation rate should be close to the central bank's forecast," said Mário Blaščák of Allianz-Slovakia.

"We think the central bank's forecast is more realistic, and that the commission's prognosis was too high," agreed SLSP bank economist Mária Valachyová.

Inflation risks in the near future include oil prices and a possible strengthening of the US dollar, the currency in which Slovakia pays for its oil. Economic growth - 9.8 percent y-o-y in the third quarter - could also raise inflation as real wages rise along with GDP.

"The appetite of consumers to spend is strong, and will remain so," said ING economist Pavol Ondriska.

However, to contain these risks, the central bank is expected to raise key interest rates for the fifth time this year by 25 basis points to five percent some time in November.

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