The decline of the Slovak currency following its floatation earlier this month will add several percentage points to inflation by the year's end, analysts said.
The central bank has said it expects the depreciation to raise prices by 1.5 to 4.0%, but it has not given any specific update on its previous inflation target of 5.6 to 5.9% for December year-on-year.
"They are obviously not going to meet that target," said Miloš Bozek, an analyst at J&T Securities. "Our calculation is that year-on-year (December) inflation will be 10.3%, and average inflation 7.6%," he said. Bozek's predictions, based on the exchange rate of the crown's being some 14% below the central parity of its former mark/dollar basket, were at the upper end of the range of expectations for year-end inflation.
The central bank (NBS) yielded to investor pressure and abolished the crown's plus/minus 7.0 percent trading band on October 1.The crown was trading at around 6.4% below the the basket parity prior to the floatation. After floatation it fell quickly but has since regained some ground and has stabilised between minus 11 and 13%. The crown was stable in early trading on October 13 at 21.950/150 to the mark, 12% below the basket parity.
Ján Tóth, an analyst at Tatra Banka, said he expected the filtering of the depreciation into prices to be complete by the end of the year and that year-on-year inflation in December would be 8.0%. "About 32% of the crown's depreciation will be reflected in inflation, but we also must factor in the lowering of the import surcharge to zero from three percent as of October," Tóth said. In line with OECD rules, Slovakia has been gradually phasing out an import surcharge imposed last year to tackle the trade deifict.
"My calculation is that inflation will rise to 6.8% in October, 7.7% in November and eight percent in December," added Tóth. He said he also based his calculations on the crown settling at around 14% below the midpoint of the former basket. A longer-term forecast would depend on future government policy on lifting price regulations. Consumer prices rose 0.4% in September, putting year-on-year price growth at 5.9%.
Ivan Chodak of CA IB said he expected CPI to grow to 8.5% by the end of the year and keep on rising to 10 or 11% by the end of 1999. "The main influence will be seen next year, because prices will be gradually snowballing," he said. "I think there will clearly have to be a restrictive (monetary) policy."
The floatation of the currency, which was already seen as vulnerable because of the country's huge current account deficit, came after a general election in September. The election saw the defeat of Premier Vladimír Mečiar, whose government viewed a strong crown as a matter of pride. Opposition parties are holding talks on forming a new government but they have not yet indicated what their economic policies will be.
Parliament reconvenes on October 29, the earliest possible date that a new governmet can come to power.