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Despite minor jump in October, 1997 inflation target should be met

Slovak monthly consumer inflation accelerated in October as expected, but analysts said they were optimistic that the official annual target of below 6.7 percent for CPI would still be met.
The Slovak Statistical Office (ŠÚSR) said on November 11 that inflation rose 0.9 percent month-on-month in October, compared with an increase of 0.2 percent a month ago, putting prices 5.9 percent higher year-on-year.
"We expected a slight acceleration in the consumer price index (CPI) in October, so the data is not surprising," said Marin Barto, an analyst at ING Barings. "The inflation figures look very good and the outlook for the rest of the year also appears positive."

Slovak monthly consumer inflation accelerated in October as expected, but analysts said they were optimistic that the official annual target of below 6.7 percent for CPI would still be met.

The Slovak Statistical Office (ŠÚSR) said on November 11 that inflation rose 0.9 percent month-on-month in October, compared with an increase of 0.2 percent a month ago, putting prices 5.9 percent higher year-on-year.

"We expected a slight acceleration in the consumer price index (CPI) in October, so the data is not surprising," said Marin Barto, an analyst at ING Barings. "The inflation figures look very good and the outlook for the rest of the year also appears positive."

Barto believes that ŠÚSR's 6.4 to 6.7 percent projection for the 1997 inflation rate seems realistic. "We do not think there is too much room for a further slowing of inflation, but we also don't expect a radical acceleration, so there should be no significant shifts in CPI in either direction until the end of the year," Barto added.

However, some economists have warned that current high interest rates could spark inflationary pressures early next year by hurting the revenues of companies which will subsequently pay lower income tax.

"The government might attempt to compensate for lower income tax revenue by increasing some consumption taxes and this would mean an acceleration of the CPI," said Vladimír Kukliš of ČSOB. "Furthermore, a widening budget deficit [due to lower tax incomes], always poses a danger for the currency, and currency stability is one of the key factors to keep the CPI on a positive track," he added.

Kukliš said there are two main factors that have enabled Slovakia to keep the lowest inflation rate among all transforming economies in eastern Europe.

"The first factor is state regulation of some prices which, [if liberalized], would have a strong tendency to rise, such as energy prices," Kukliš said. "The other is the central bank's success in keeping the currency stable."

The National Bank of Slovakia (NBS) has succeeded in defending the crown, gaining respect especially during last May's attack on emerging market currencies. Its strategy of tight regulation of money market liquidity also safeguarded the crown against any negative effects of the most recent international market turmoil.

However, the fight for currency stability has resulted in low liquidity and pushed interbank rates above 20 percent. Market analysts don't expect the NBS to loosen its strict monetary policy despite the positive inflation development.

"One of the main reasons for tightening the policy last year was money supply growth, and this is still growing faster than the annual target, so a policy easing is unlikely in the mid-term," Kukliš said.

The M2 key money supply aggregate rose by 13.5 percent year-on-year last August, while the NBS's 1997 target is 10.7 percent.

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