UPDATE 2-Slovak inflation at record low, no rate change seen

...to a 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. 
    Consumer prices were unchanged on a monthly basis 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 inflation. 
    The central bank said in a statement that May inflation was 
below its forecasts as the annual rise in the cost of both goods 
and services slowed. The bank did not comment on possible 
monetary policy implications, but said that inflation might not 
stay at the record low levels for long. 
    "Annual inflation dynamics could accelerate in June, 
compared with May, mainly due to expected developments with fuel 
prices, while prices in other groups of the basic inflation 
structure should stagnate on the annual basis," the NBS said. 
    The currency market ignored the data release, with the 
Slovak crown trading in a narrow range of 34.250-34.330 per euro 
for most of the session. 
    Central Bank board member Ludovit Odor said the inflation 
data did not show any imminent demand-led pressures, although  
energy and food costs remained risks for future price growth. 
    But he expected 12-month average inflation, key for 
assessing Slovakia's readiness to join the euro, to keep falling 
until spring 2008 when a ruling will be made on the 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 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's policy stance as the bank needs to bring its 
key interest rate in line with the euro zone benchmark by 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 4.0 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," said Lucia 
Steklacova, senior analyst at ING Bank in Bratislava. 
    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] 
  
  Keywords: SLOVAKIA ECONOMY/INFLATION