UPDATE 1-Slovak inflation drops to record low, rates seen flat

...record low of 1.5 percent in May but the 
central bank (NBS) is expected to keep interest rates steady as 
it aims to move into line with euro zone borrowing costs. 
    On a month-on-month basis prices were unchanged in May, the 
Statistics Office said on Thursday, causing the annual inflation 
rate to slide from 2.0 percent in April, undercutting analysts' 
forecasts of 1.7 percent year-on-year. 
    Lucia Steklacova, senior analyst at ING Bank in Bratislava, 
attributed the slowdown to a 3 percent monthly drop in drug 
prices. 
    The currency market ignored the data, with the Slovak crown 
virtually flat at 34.29 to the euro . 
    Central Bank board member Ludovit Odor said the data did not 
show any imminent demand-led pressures, although prices of 
energy and food still remained risks for future price growth. 
    But he said he expected 12-month average inflation, key for 
assessing the country's readiness to join the euro, to keep 
falling until spring 2008 when the ruling will be made on the 
country's planned euro adoption in 2009. 
    The trend of the average inflation rate is lagging the sharp 
slowdown in year-on-year data published monthly. 
    "It is very likely we will meet the inflation criterion," 
Odor told reporters on the sidelines of a Hospodarske Noviny 
business conference. 
    The central bank expects the reference rate, defined as 1.5 
percentage point over the average of three lowest average 
inflation rates in the EU, to be at about 2.7 percent next 
spring. 
    The bank sees annual average inflation rate at around 1.5 
percent in spring next year, giving Slovakia a wide buffer for 
meeting the price growth condition for euro zone entry. 
    "The trend is favourable, Slovakia should fulfil the 
inflation criterion (for euro adoption) as early as in one 
month, or two months at the latest," said Slovenska Sporitelna 
analyst Michal Musak. 
    Analysts also said Thursday's data was unlikely to have an 
impact on the NBS' policy stance as the bank needs to bring its 
key interest rate in line with the euro zone benchmark ahead of 
euro entry. 
    The NBS eased policy in two 25 basis point cuts in March and 
April, lowering the key two-week repo rate to 4.25 percent. 
    The European Central Bank lifted its main rate to 4 percent 
last week and signalled it is ready to tighten policy again. 
    "The ECB will probably move towards our rate at 4.25 percent 
and that would mean we will not see any more rate reductions in 
Slovakia despite a favourable inflation trend," Steklacova said. 
    Odor confirmed the central bank was watching the ECB and no 
significant policy steps could be expected. 
    "Because there are no big differences between our rates, 
then we cannot expect major changes in the monetary policy in 
terms of interest rates, either in an upward or downward 
direction," he said. 
 (For details on May inflation data please click on 
[ID:nL14622184] 
 (Additional reporting by Peter Laca) 
  
  Keywords: SLOVAKIA ECONOMY/INFLATION