* Economy slightly overheating, no major domestic inflation
risks at present
* Strong crown to slow GDP growth, but significant forecast
revision not needed
* Rates alignment with euro zone depend on ECB steps
By Peter Laca
BRATISLAVA, June 13 (Reuters) - Slovakia's fast growing
economy is slightly overheating but is not creating major
inflation pressures requiring action through policy adjustments,
central bank board member Ludovit Odor said.
Speaking to Reuters in an interview on Thursday, Odor said
the monetary and fiscal policy mix was slightly restrictive at
present, which was appropriate for the current economic cycle.
Interest rate moves will depend on the European Central Bank's
stance, he said.
Slovakia, set to become the 16th member of the euro zone
next year, had the highest gross domestic product growth of 8.7
percent in the European Union in the first quarter, fuelled by
strong household spending.
Odor said the economy, still catching up with more developed
EU members after decades of communist rule, was running a little
above capacity but was not spurring inflation.
"The economy is in a phase of slight overheating, but the
output gap is very close to zero so we really cannot say there
are immediate risks that would require some serious or
extraordinary policy measures," said Odor.
First quarter data also showed real wage growth of 6.2
percent, exceeding productivity gains, but Odor said it was not
causing major inflation dangers.
RESTRICTIVE MIX
Slovak inflation has picked up speed in the past months,
mainly due the global rise in food and energy costs, which have
tightened the interest rate outlook for central Europe as well
as the euro zone. Annual inflation hit a 20-month high of 4.6
percent in May.
Some analysts said upward pressure on prices stemming from
consumer spending was gradually rising, but Odor did not see
inflation fuelled by demand as an immediate danger.
"Demand side pressures are still relatively low," he said.
"My main concern is that this permanent increase in
commodity prices may build into higher inflation expectations.
(The current) tighter monetary policy stance is therefore
appropriate."
Slovakia's efforts to keep inflation in check is helped by a
firming currency, which has gained 10 percent since the start of
2008 as investors expect it to seek a strong euro entry
conversion rate.
Odor declined to comment on the market view that Slovakia
would set the conversion rate at or near the crown's central
rate within the ERM-2 exchange rate grid. The rate was revalued
by 15 percent to 30.1260 crowns per euro in May.
He said crown firming had tightened monetary conditions,
while the government had contributed with a more substantial
fiscal deficit reduction last year than originally planned.
"Therefore, the economic policies are a bit restrictive at
the moment, which is appropriate given the current phase of the
economic cycle."
The strong crown will have a small negative impact on
economic growth, Odor said, but there was no reason for a
significant revision of the central bank's forecast for 7.4
percent growth this year.
RATES ALIGNMENT
The NBS will have to align its official interest rates with
the euro zone by the end of the year as part of the euro
adoption process. The main two-week rate is now at 4.25 percent,
25 basis points above the euro zone benchmark rate.
Odor said when and how the rates will be aligned depended to
a large extend on policy steps by the European Central Bank.
"Given the small differential, it is more or less a
technical matter of timing... From the economy's point of view,
aligning the official rates does not play a significant role."
"In my opinion, it would not make much sense to lower rates
and increase them again if the ECB raised its rates," Odor said.
(Reporting by Peter Laca)
