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Inflation rate lowest since 1997

LAST spring a World Bank report on the economic performance of the Visegrad Four countries warned that inflation could become Slovakia's main problem in the run up to euro adoption while the country's central bank crusaded to curb inflation by raising key interest rates. The latest inflation data gives the central bank and market watchers a reason to relax.

LAST spring a World Bank report on the economic performance of the Visegrad Four countries warned that inflation could become Slovakia's main problem in the run up to euro adoption while the country's central bank crusaded to curb inflation by raising key interest rates. The latest inflation data gives the central bank and market watchers a reason to relax.

Inflation in Slovakia reached 1.5 percent in May 2007, the lowest since 1997 when Slovakia came under the EU-norm harmonized consumer prices index and lower than the National Bank of Slovakia had expected.

This year's decline in inflation has been driven by lower energy prices (the year-on-year decrease of global oil prices and subsequently local energy costs also); the strong crown helping bring inflation down in the industrial goods segment and moderation in services price inflation, Chief Economist of the VÚB bank Zdenko Štefanides told The Slovak Spectator.

Harmonized inflation has been slowing down its year-on-year growth since the beginning of the year, added Silvia Čechovičová, an analyst with the ČSOB bank. Lower VAT on drug products and the lower prices of housing related services are also among the factors that have slowed down the inflation rate, she said.

Headline inflation in Slovakia decelerated from 2.7 percent in April to 2.3 percent year-on-year in May. Consumer prices remained unchanged from April in a monthly comparison while consumer prices rose by 2.7 percent in the first five months of the year, which was 0.1 percentage point less than the average inflation for the first four months, the Slovak Statistics Office reported.

Core inflation has slowed down by 0.4 percentage points from April to 2.2 percent year-on-year in May. Monthly core inflation amounted to 0.2 percent in May, the statistics authority said. Monthly net inflation stood at 0.1 percent in May, holding the same level for the third consecutive month. Net inflation slowed down by 0.2 percentage point year-on-year in May to 2.2 percent.

"In fact, the only segments posting an increase in year-on-year dynamics were alcohol products and utilities (due to rising imputed rents)," said Štefanides.

In order to qualify to enter the eurozone, Slovakia must have an inflation rate that is within 1.5 percentage points of the average of the three best performing EMU countries. Long-term interest rates should be no more than 2 percentage points above the average for these countries.

"The current Maastricht inflation criterion amounts to 3 percent and the relevant figure for Slovakia is 3.2 percent, hence Slovakia is not far away and we actually expect to start meeting the criterion in July or August," Štefanides said.

"Out of the other four criteria, Slovakia meets the interest rate and public debt criteria," said Štefanides. "We should meet the fiscal deficit criterion from this full year onward and the exchange rate stability (2-year stay in ERMII) criterion from the end of November."

Analysts however agree that the risks are mainly perceived on the fiscal criterion, which requires that the public finance deficit is kept below 3 percent of GDP.

At the moment, the major risks for failing to meet the Maastricht criteria and adopting the euro on January 1, 2009 are not connected to the development of the economy as such but rather factors operating outside of Slovakia, Ivan Šramko, the Governor of the National Bank of Slovakia, wrote on the Hospodárske Noviny daily's online discussion forum earlier this month.

The governor also said that the Slovak economy's high growth does not bring increased risks in the field of inflation.

While the strong currency helps pacify inflation, market watchers hope that no serious diet is expected for the Slovak currency.

"Our medium and long-term outlook assumes the strengthening of the currency while its appreciation trend might get renewed in the autumn through support from strong GDP growth, shrinking foreign trade deficit and the improvement of the current account of the balance of payments," Čechovičová told The Slovak Spectator.

The regional sentiment will also play an important role, Čechovičová said. Inflation expectations will finally get anchored in the United States and in the eurozone and there will be no reason for the further growth of global revenues, which should be reflected in the normalization of the aversion towards riskier assets, from which all Central European currencies should benefit, including the Slovak crown, said Čechovičová.

After the country fulfils the Maastricht criteria, the Slovak crown could be exchanged at Sk32.39 per euro, according to a survey by the independent think-tank INEKO and the Club of Economic Analysts conducted in May.

The INEKO estimates ranged from Sk31.00 to Sk33.60 per euro while analysts assume that the Slovak currency will reach a rate of Sk32.68 per euro by the end of this year, the SITA newswire reported.

Slovakia's chances of adopting the euro according to plan in 2009 have increased, according to analysts and economists, by 1 percent to 77 percent, the INEKO survey said.

"Currently the probability of meeting all the criteria on time to adopt the euro in 2009 exceeds 80 percent," Štefanides told The Slovak Spectator.

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