Slovak Dec CPI below fcast, rates seen on hold

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Slovak inflation rose less than expected in December, data showed on Friday, and a bright inflation outlook tied with a stronger currency are likely to prevent further monetary tightening, analysts said.

The Statistics Office said the annual rate of consumer price inflation eased to 4.2 percent in December from 4.3 percent a month ago, a touch below the market forecast of 4.3 percent.

Analysts said the data are unlikely to prompt a move by the central bank and added that despite economic growth approaching double digits a strong crown and lower global oil prices have kept inflation in check allowing the Slovaks to remain on track for euro adoption in 2009.

The crown -- which firmed nearly 10 percent last year -- showed little initial reaction to the data, but later weakened through a strong support level of 34.650 per euro as London-based investors sold off their crown holdings. It traded at 34.750 per euro as of 1000 GMT.

"Relatively low inflation, the changing economic growth structure in favour of foreign demand and a strong crown are reasons for the central bank to hold interest rates unchanged in the coming months and even start cutting rates in the second half of 2007 to move closer to the ECB in light of approaching euro adoption," said Citibank analyst Miroslav Plojhar.

The central bank has lifted its key two-week repo rate, now standing at 4.75 percent, by 175 basis points over the last year to curb rising inflation risks, a key challenge for Slovakia's plan to enter the euro-zone in 2009.

The central bank predicts inflation will fall to 2.6 percent at end-2007, while expecting average price growth at 2.5 percent in spring 2008, when Slovakia will be assessed for euro entry.

However, analysts said the key risk for consumer prices still stems from the uncertainty over energy costs, possible domestic demand pressures spurred by fast economic growth and a weakening of the currency and some question whether the euro zone target can be met.

"We remain sceptical as to whether inflation can remain low enough, for long enough, to ensure that it remains no more than 1.5 percent higher than the three lowest inflation economies in the EU," said Juliet Sampson, an economist at HSBC in London.

"Today the reference for the Maastricht inflation criterion would be just below 3.0 percent (though it could be higher or lower than this for the relevant period), compared with an inflation projection for Slovakia for the Maastricht relevant period (April 2007 to March 2008) of 3.2 percent."

In a separate data release Slovak retail sales growth slowed to 7.4 percent year-on-year in November, after a 7.6 percent rise a month ago, while average industrial wage growth slowed to 0.5 percent year-on-year in November, compared with a 1.5 percent rise in October, data showed.

[BRATISLAVA/Reuters/Finance.cz]