UPDATE 2-Slovak crown firms to new all-time highs

(Releads, adds more analyst comments, background)

By Peter Laca and Martin Dokoupil

BRATISLAVA, Oct 11 (Reuters) - The Slovak crown firmed to an all-time peak to the euro on Wednesday on more bullish regional sentiment and expectations the central bank will hike rates again this year to keep inflation in check.

Traders said the currency was also boosted by news that Slovakia's 2007 state budget draft appeared consistent with its ambition to adopt the euro in 2009.

The crown, which has been firming for the past two weeks, climbed as far as 36.860 per euro early in Wednesday's session <EURSKK=>. It was quoted at 36.860/880 as of 0910 GMT, compared with 37.000 late on Tuesday, and the previous all-time high of 36.925 from March.

The crown's strength was expected to help the central bank with its fight against inflation, but analysts were still betting on higher interest rates the coming months.

"The crown firming, along with other factors such as a decline of oil prices in world markets, is lowering inflationary risks, which are worrying the central bank," said CSOB analyst Silvia Cechovicova.

"But I still think that they will hike interest rates by 25 basis points this year to fulfil Maastricht inflation criteria," she said.

The inflation rate has been above the central bank's target of 2.5 percent this year due to high oil costs and rising domestic demand stemming from strong economic growth.

The central bank (NBS) has raised the key two-week repo rate by 175 basis points to 4.75 percent in four steps this year in its efforts to meet the inflation condition for euro adoption.

Earlier on Wednesday, data showed inflation slowed to 4.6 percent on an annual basis in September from a 5.1 percent peak in August, beating market expectations.

STRONG FUNDAMENTALS

Analysts said Slovakia's economic fundamentals had long supported the crown, but the currency came under pressure after the election in June of leftist Prime Minister Robert Fico.

"The economy is growing at a solid pace, foreign direct investment inflow continues and productivity is rising, so all the factors speaking in favour of crown appreciation are there," said Slovenska Sporitelna analyst Maria Valachyova.

Slovakia has posted one of the highest economic growth rates in the European Union in the past four years, and real gross domestic product is expected to rise by 6.7 percent this year.

Investors had worried Fico's pre-election promises of more social spending would boost the fiscal deficit and delay euro adoption.

But the finance ministry has prepared a 2007 budget draft that sets the deficit at 2.9 percent of GDP -- just below the EU's 3.0 percent ceiling.

The government is expected to debate the 2007 fiscal plan later on Wednesday.

((Editing by Ruth Pitchford; martin.dokoupil@reuters.com; Reuters Messaging: martin.dokoupil.reuters.com@reuters.net; +421-2 5341 8402))

Keywords: MARKETS SLOVAKIA CROWN