UPDATE 1-Slovak inflation falls to record lows in February

...to record lows in February, data showed on Thursday, 
boosting market expectations for lower interest rates this year. 
    Consumer prices rose by 0.1 percent on the month, putting 
annual inflation at 2.0 percent using the EU's standard 
inflation measure, the Statistics Office said. 
    The figures were below market forecasts of 0.2 percent 
monthly and 2.1 percent yearly inflation in February. The annual 
inflation rate dropped from 2.2 percent in January. 
    "The data are encouraging for the crown. A favourable 
inflation outlook also gives the central bank room to lower 
interest rates," said Juraj Valachy, an analyst at Tatra Banka. 
    The central bank, which targets EU-norm inflation as part of 
Slovakia's plan to adopt the euro in 2009, said the February 
reading was slightly lower than its expectations. 
    It did not publish its February forecast, but added the 
annual inflation rate should be slightly higher in March due to 
prices of fuels and possibly also because of higher cost of 
services. 
    Slovak price growth has slowed this year as the impact of 
last year's rises in energy costs fades. The central bank 
predicts the inflation rate to fall to 1.5 percent in December 
2007. 
    "Although an external shock cannot be completely ruled out, 
Slovakia's inflation outlook is very favourable," said Lucia 
Steklacova, a senior analyst at ING Bank in Bratislava. 
    "The recent crown firming has also increased chances for an 
earlier reduction in interest rates, which could come as early 
as in the second quarter," Steklacova said. 
    The crown has gained 4.9 percent against the euro in the 
past six weeks, and traded at 33.970 per euro on Thursday. This 
has tightened monetary conditions and kept a lid on imported 
goods  prices. 
    The crown rise has been fuelled by Slovakia's record 
economic growth of 8.3 percent in 2006, foreign direct 
investment inflows and improving trade balance. 
    Some analysts, however, say the central bank should not cut 
rates before it is sure of meeting euro adoption conditions. 
    "We expect the central bank to lower interest rates in the 
second half of the year, since external inflation risks, mainly 
oil prices, still persist," said Maria Valachyova, a senior 
analyst at Slovenska Sporitelna. 
    The central bank held its key two-week repo rate at 4.75 
percent for a fifth successive month at its last policy-setting 
meeting on Feb. 27. 
  
  Keywords: SLOVAKIA ECONOMY/INFLATION