UPDATE 1-Slovak Dec HCPI in line, c.bank seen waiting

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By Martin Dokoupil

Slovak annual EU-harmonised inflation remained steady in December, data released on Wednesday showed, leaving the central bank (NBS) room to hold off on changing policy as it waits for further data.

Data from the Statistics Office showed year-on-year inflation held steady from November to December at 3.7 percent, while prices rose 0.1 percent over the month.

The NBS said the figure, which matched market forecasts, came below its expectations. In October, the bank forecast end-year inflation of 4.1 percent.

"This is not new information that will affect monetary policy settings and the crown market," said Marek Gabris, analyst at CSOB bank in Bratislava.

The NBS follows EU-norm data as a part of Slovakia's plan to adopt the euro in 2009. Inflation calculated under the local methodology was flat on the month in December and stood at 4.2 percent on the year.

EU-harmonised inflation eased to a one-year low of 3.1 percent in October, but prices edged up again in November due to higher natural gas and food prices.

The central bank has kept the key repo rate at 4.75 percent for the past three months, allowing the crown's rise to tighten monetary conditions instead.

The crown, which hit a one-month low of 35.100 per euro on Wednesday , has lost 3 percent against the euro since touching a record high of 34.050 on Dec. 28, undermined by the actions of the NBS and weak foreign trade data.

WAIT AND SEE

But analysts said monetary conditions were still tight despite the crown's retreat, giving the NBS time to wait to see if new data confirms easing inflationary pressures in the booming economy.

"The central bank will wait (at its Jan. 30 meeting) to see whether inflation is really falling," said Miroslav Plojhar, analyst at Citibank in Prague. "January inflation will show whether they have room to cut rates sooner or later."

"The bank also has to see that the structure of economic growth is changing as expected from a consumption driven to a more balanced one. But so far trade balance figures were a disappointment," he said.

The NBS expects prices of food and services to rise on a monthly basis in January, while natural gas and fuel prices should decline.

"The annual inflation dynamics should slow down significantly due to a base effect," the bank said in a statement.

Analysts predict that January inflation will fall below the 3 percent mark for the first time since September 2005 as state-regulated energy prices will decline or stay flat.

The NBS increased lending costs by 175 basis points last year to rein in inflationary pressures in the Slovak economy, which grew by a record 9.8 percent in the third quarter.

Inflation is a key obstacle for Slovakia's euro adoption plan, but NBS board member Karol Mrva said in Vienna on Wednesday he expects the EU member to meet the entry criteria by the end of 2007.

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. The NBS will release new predictions on Jan. 30. (Additional reporting by Martin Santa)

((Editing by Matthew Tostevin, Reuters Messaging: martin.dokoupil.reuters.com@reuters.net; +421 2 5341 8402))

Keywords: SLOVAKIA ECONOMY/HCPI

[BRATISLAVA/Reuters/Finance.cz]