UPDATE 1-Slovak inflation record low in July, rates seen flat

...

By Martin Santa

Cheaper food drove Slovak inflation to a record low of 1.2 percent year on year in July, data showed on Thursday, but the market expected no monetary policy reaction to the fall in the rate.

Inflation, as measured by EU methodology, 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. The central bank also said July annual inflation rate was below its forecasts.

"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.

The central bank (NBS) said record low inflation might not last too long as price growth could pick up speed as early as in August.

"Annual inflation dynamics could accelerate slightly in August compared with July, mainly due to an expected acceleration in the year-on-year dynamics of services prices, as well as due to a higher rise in food prices," the NBS said.

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

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

Analysts said the July inflation data were neutral for the NBS, adding that the bank was likely to hold interest rates 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. This would bring its key rate into line with Slovakia's benchmark, which has stood at 4.25 percent since April, although the financial markets have been increasingly uncertain over policy actions due to 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]