UPDATE 1-Slovak inflation slows in Jan, rate cut seen later

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By Martin Santa

Slovakia's EU-norm inflation slowed down in January on a smaller annual rise in energy prices, confirming a favourable inflation outlook and underlining market expectations of monetary policy easing later in the year.

The Statistics Office said on Wednesday consumer prices rose by 0.5 percent month-on-month in January, according to EU methodology -- putting the annual inflation rate at 2.2 percent. The data were in line with market expectations.

The annual inflation rate stood at 3.7 percent in December. The decline was caused by the fading impact of energy prices, which shot up at the beginning of 2006 due to the rising cost of oil.

"The figure is the start of lower inflation, but it is only the first month and there are still risks stemming from prices of food and energy prices, which the central bank cannot influence," said ING Bank analyst Eduard Hagara.

"These are positive figures. If this level is sustained, the central bank could move towards lower interest rates."

The Slovak central bank (NBS), which targets EU-norm inflation as part of the country's plan to adopt the euro in 2009, said the January reading was slightly higher than its expectations.

It did not reveal its January forecast, but said the annual inflation rate should be lower in February thanks to smaller increases in energy and food prices.

In a separate release, the Statistics Office said producer prices fell by a monthly 0.5 percent in January, compared with a market forecast of a 0.3 percent rise. The annual factory-gate inflation (PPI) was 3.4 percent, below 4.3 percent forecast.

FAVOURABLE OUTLOOK

The NBS expects consumer inflation to slow down further later this year, and it sees the end-2007 rate at 1.5 percent.

But analysts said the bank would not rush with rate cuts as it needs to see more data to make sure the country meets the euro adoption criteria.

"It (January data) is the beginning of the long-awaited trend, but the central bank will wait for longer-term trends of energy prices, and for the GDP growth structure," said Maria Valachyova, senior analyst at Slovenska Sporitelna.

The NBS, which tightened monetary policy by 175 basis points last year, left the main two-week interest rate unchanged at 4.75 percent at the monthly monetary policy meeting on Feb. 27.

But the bank discussed a rate cut at the meeting, following an unsuccessful vote on policy easing in January, which underpinned market expectations of lower rates later this year.

A closely watched piece of data will be the release of the GDP structure for 2006, which is scheduled for March 6.

Preliminary statistics showed real GDP growth of 9.5 percent in the fourth quarter of 2006, but the central bank said economic expansion appeared to have been driven by rising productivity and was not creating additional inflation risks.

((Writing by by Peter Laca, editing by Stephen Nisbet; Reuters Messaging: peter.laca.reuters.com@reuters.net; +421 2 5341 8402))

Keywords: SLOVAKIA INFLATION/

[BRATISLAVA/Reuters/Finance.cz]