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ONLY OFFICIAL REPORTS AND DATA MATTER, FINANCE MINISTRY SAID

ECB enters inflation talk

ONLY a couple days after Slovakia reported its inflation rate had fallen to a record low of 1.5 percent, the European Central Bank reportedly stated that the lower rate might be short lived. The country might have difficulty sustaining the lower inflation rate since it is currently supported by a combination of lower energy prices, strong currency and government pressure on energy companies' profit margins, reads the ECB memo to the International Monetary Fund that the newswire Reuters released on June 26.

ONLY a couple days after Slovakia reported its inflation rate had fallen to a record low of 1.5 percent, the European Central Bank reportedly stated that the lower rate might be short lived. The country might have difficulty sustaining the lower inflation rate since it is currently supported by a combination of lower energy prices, strong currency and government pressure on energy companies' profit margins, reads the ECB memo to the International Monetary Fund that the newswire Reuters released on June 26.

The country's inflation outlook will be crucial in deciding on Slovakia's entry into the euro zone, the memo said, adding that the governmental pressures on prices can provide only "temporary relief in inflation reduction and do not contribute themselves to sustainable downward trends," according to Reuters.

Slovakia's central bank 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," Miroslav Šmál, spokesman of the Finance Ministry, told The Slovak Spectator. "The current development of public finances does not imply that meeting the Maastricht criteria and the adoption of euro in January 1, 2009 might be endangered."

The Finance Minister has been attending top level talks at the EU level and during these official talks he has not heard any of these concerns, Šmál said. Whenever a country gets close to adopting the euro, their chances of meeting the criteria are closely scrutinized in a similar way, he added.

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. The central bank assumes inflation will reach 1.9 percent when measured by the HICP index.

"What is continuously being expressed is a warning that we should not only meet the criterion, but sustain it," Governor of the National Bank of Slovakia Ivan Šramko told the Sme daily.

Šramko said he was confident that Slovakia will meet the inflation criterion with enough reserve.

"Based on estimates of expected inflation developments, the central bank considers that the entry into the eurozone in 2009 can be realistically expected," the central bank's press department told The Slovak Spectator.

The Slovak currency responded to the reports by slightly weakening, losing 15 hellers, but after state officials made their statements the crown regained most of its lost strength.

Although Slovak market observers have not shown major concern over the ECB's statements, they said that the government will have to be watchful in its fiscal policies and price pressures.

"As far as I know, the ECB has not really cast doubt on the adoption of euro, it only stressed the need of the sustainability of inflation even after the adoption of euro," Juraj Kotian, chief economist of the Slovenská Sporiteľňa bank, told The Slovak Spectator.

"I see the assessment only as a warning that it is necessary to focus on the elimination of medium-term inflation risks and not push down inflation exclusively through administrative measures such as pushing down energy prices or VAT," said Kotian. "These reduce inflation only temporarily and create higher inflation risks for the future."

According to Kotian, if the state intervenes to push down prices or increase spending in the time of a nine percent growth, it is increasing the cyclic nature of economy that brings along some inflation risks for the future.

"The increase of prices in the long-term is correlated with the increase of incomes, which means that inflation will catch up with you sooner or later," Kotian said. "European institutions strongly recommend that, in times of intense economic growth, governments focus on reducing the deficit, which is the most active way of reducing inflation risks. If we spend more and justify it by citing faster economic growth and higher tax collection, we are doing the opposite."

However, Former Finance Minister Ivan Mikloš has displayed inflation-related concerns and, in response to the ECB memo, has said that the Slovak government has been endangering the plan to adopt the euro in January 2009 with its economic policies.

"For example, limiting the independence of the regulatory state bodies and creating pressures to keep prices temporarily low risks making the fulfilment of the inflation criteria unsustainable," Mikloš told the TASR newswire.

Mikloš has called on Prime Minister Robert Fico to unambiguously declare that the cabinet will clearly push for the sustainable fulfilment of the Maastricht criteria even after 2008.

Several statements made by Fico suggest that the fiscal discipline is tuned in a way that will only work until 2008, said Mikloš.

"There will be additional objections coming," Mikloš said. "We call on the prime minister to do something to disperse these fears."

The markets are pretty certain about Slovakia's entry into the eurozone and its rejection would weaken the currency and pump interest rates up, Kotian said, adding that, for other countries, it would transmit the message that the fulfilment of the Maastricht criteria cannot be just a formality.

Chief Economist of ING Bank Ján Tóth suggested that the ECB's letter might imply that the professional dialogue between the central bank and European institutions is not strong enough.

"It might be because there is no vice-governor for euro adoption or maybe the lack of professional capacity," Tóth told Sme.

The post has been vacant since President Ivan Gašparovič refused to appoint former deputy finance minister Vladimír Tvaroška to the post last year.

"This is connecting two unrelated issues," the National Bank of Slovakia told The Slovak Spectator. "It is impossible to assess the quality of the dialogue from the fact that the bank has not yet filled the post of vice-governor. The national bank also has other members of the bank board and a number of experts who have been communicating with European institutions."

Fico has said several times that his government is committed to the adoption of euro.

"Everything is second to the fulfilment of the Maastricht criteria," Fico told business leaders during an Economist roundtable held from June 25 to 26 in Bratislava.

"We have been criticized for our tougher approach to monopolies, but if we are serious about the aim to install the euro in January 2009, we have to use all the tools that a democratic regime allows us to use to influence energy prices, which represent the largest price burden not only for the business sector but also for general public," said Fico.


Jana Liptáková contributed to this report.

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