Slovak inflation hits record low, rates seen flat

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A further fall in food prices drove Slovak inflation to a record low of 1.2 percent year on year last month, official data showed on Thursday, but most analysts expect local interest rates to stay flat this year.

The inflation rate, measured by EU-norm statistics, was down from 1.5 percent in June. Month on month, consumer prices fell 0.1 percent in July after gaining 0.1 percent in June.

Analysts had expected consumer prices to remain steady in July and show a 1.4 percent year-on-year rise.

"Food prices were behind the (month-on-month) decline. This is no surprise given the last week's local methodology inflation data," said Maria Valachyova, analyst at Slovenska Sporitelna.

Food prices, which have a strong weighting in the price basket, fell by 1.3 percent month-on-month, after a 0.4 percent fall in June, data showed.

Slovak inflation has eased this year due to a positive base effect, firming of the crown currency, and in part to government pressure on utilities to keep energy prices down.

EU-norm inflation is the key gauge for the central bank (NBS) ahead of Slovakia's adoption of the euro planned for 2009. It sees the end-2007 annual rate at 1.3 percent.

"Inflation data from other EU countries will be released today, so we will see if we meet the inflation criterion for the first time in July," said Tatra Banka analyst Juraj Valachy.

Analysts said July inflation data were neutral for the NBS, adding the bank was likely to stay put in the coming months, waiting for European Central Bank (ECB) action.

"We do not see any implications for monetary policy settings. The central bank will continue to watch the European Central Bank interest rate moves," said Eduard Hagara, analyst with ING Bank in Bratislava.

The ECB is expected to lift interest rates by 25 basis points in September, bringing its key rate in line with Slovakia's benchmark, which stands at 4.25 percent since April, although the financial markets have been increasingly uncertain over policy actions due to a worldwide market turmoil.

(For details of July inflation data please click on [ID:nPRG000461])

(Additional reporting by Martin Dokoupil)

Keywords: SLOVAKIA ECONOMY/INFLATION

[BRATISLAVA/Reuters/Finance.cz]