Slovak retail sales confirm rate hike outlook

BRATISLAVA, Nov 9 (Reuters) - Slovak retail sales rose faster than expected in September, data showed on Thursday, confirming strong domestic demand and adding to expectations of more monetary policy tightening.

The retail sales rose by 10.6 percent in September, accelerating from 8.0 percent in the previous month, the Slovak Statistics Office said.

Slovakia's domestic demand has been rising steadily over the past two years after consumers recovered from a series of belt-tightening government measures.

Rising household consumption has been fuelling economic expansion, which, at an estimated 6.8 percent this year, should be one of the highest GDP growth rates in the European Union.

But strong domestic spending is also a risk for inflation outlook, as Slovakia needs to reduce price growth to be eligible for a planned euro adoption in 2009.

"The central bank has mentioned domestic demand as one of the risks for inflation," said Maria Valachyova, senior analyst at Slovenska Sporitelna, a unit of Austria's Erste Bank.

"Today's data release confirmed the picture we have had for some time, and shows that more monetary policy tightening may be needed," Valachyova said.

The central bank has raised the key two-week repo rate by 175 basis points in four steps this year because of inflation risks stemming from uncertain trends in energy prices and strong domestic demand.

The latest policy tightening move came in September, when the bank raised the key rate by 25 basis points to 4.75 percent, and analysts predict another such hike by the end of the year.

Slovakia's EU-norm inflation, the yardstick for the euro zone entry, stood at 4.5 percent in September.

Analysts in a Reuters poll have predicted a drop in the inflation rate to 3.3 percent in October because the effect of a 2005 rise in utility prices will disappear from the statistics.

((Reporting by Peter Laca, editing by Cheryl Juckes; Reuters Messaging: peter.laca.reuters.com@reuters.net; +40 21 315 8320))

Keywords: ECONOMY SLOVAKIA DEMAND