(Adds analyst comments, background, updates crown)
By Peter Laca
BRATISLAVA, Feb 27 (Reuters) - Slovakia should negotiate a
conversion rate to the euro that will not boost inflation after
the country adopts the common currency, Prime Minister Robert
Fico said on Wednesday.
Fico, who won a 2006 election on promises to improve living
standards of Slovaks, said the government would negotiate the
switchover rate with European Union authorities after they
decide on Slovakia's application to join the euro zone.
"I believe that the rate will be set in a way that would be
favourable for the people, and that it will be a rate that will
not cause inflationary pressures, because inflation
sustainability is a criterion on which we are currently focusing
the most," Fico told a news conference after a cabinet meeting.
Slovakia aims to become the 16th member of the euro zone in
2009, and its adoption process is seen as a test case for the
whole of central Europe as it would be the first ex-communist
country with a floating exchange rate to adopt the euro.
Market watchers said Fico's comments suggested he may back
those in the central bank speaking in favour of a stronger
conversion rate which would work against a possible inflation
jump after euro entry.
"If the central bank's focus is to have low inflation, then
a stronger exchange rate is key for achieving that," said
UniCredit Bank Chief Economist Viliam Patoprsty.
"It is evident that he (Fico) is leaning towards a stronger
conversion rate, which is related to the inflation outlook...
Lower inflation in the future also means higher real wage growth
in the future," Patoprsty added.
The crown currency, which hit all-time high of 32.680 to the
euro <EURSKK=> earlier this week, firmed a quarter percent after
the comments to 32.790 from 32.880, but later dipped to 32.829
at 1500 GMT.
CENTRAL BANK SPLIT
Fico said the Slovak central bank was split on how to
approach the negotiations on the conversion rate.
"I am aware of the two tendencies at the national bank, that
part of people would welcome if the conversion rate was as weak
as possible, while the other side is saying that it is better to
have a conversion rate around a market level," Fico said.
"The market level is currently very interesting for
Slovakia," he said.
Exports from key automotive and electronics industries
helped propel Slovak economy to record high growth of 10.3
percent in 2007, although the number was skewed by pre-stocking
of cigarettes by distributors ahead of a planned tax hike.
Analysts expect productivity growth and economic expansion
in Slovakia to continue outpacing euro zone levels in the coming
years, saying that improving economic fundamentals would justify
a stronger conversion rate for the euro switchover.
NBS Vice Governor Martin Barto told Reuters last week he
thought the conversion rate should reflect future and not only
past economic developments and negotiations on its level should
also take into account inflation outlook.
NBS Board member Ludovit Odor was also reported earlier this
month as saying the rate could limit future inflation risks.
Governor Sramko has said that he did not see an overly
strong link between the exchange rate and inflation.
Other NBS policy makers have not commented on the conversion
rate negotiations and the board agreed at a policy meeting on
Tuesday it would be quiet on the issue.
(Writing by Jan Lopatka and Peter Laca, editing by David
Christian-Edwards)
