(Updates with market reaction, analyst)
By Marcin Grajewski
BRUSSELS, April 28 (Reuters) - The European Commission
forecast on Monday that Slovak annual inflation would ease in
2009 after hitting a peak this year, which analysts said boded
well for the country's bid to join the euro zone next Jan. 1.
In a twice-yearly forecast, the European Union executive
said Slovak inflation by EU definitions would fall to 3.2
percent in 2009 after peaking at 3.8 percent in 2008, compared
with 1.9 percent last year.
The forecast did not include the 12-month average inflation
rate which is used to assess whether countries are fit to adopt
the euro. But it offered some reassurance about Slovakia's
ability to keep price growth in check.
The Commission said inflation in the 15-nation euro zone was
expected to leap to 3.2 percent in 2008 from 2.1 percent last
year before slowing to 2.2 percent in 2009.
The Slovak crown <EURSKK=> <SKK=> firmed 0.34 percent to the
euro on Monday after European Commission's forecast was
published. The currency firmed to 32.270 after the news from
32.38 before the report.
Analysts and politicians have said Slovakia's uncertain
inflation outlook is its only obstacle to adopting the currency
now shared by 15 nations. Slovakia joined the EU in 2004.
"It (the forecast) is broadly positive, although the
forecasts don't completely rule out a surprise decision in my
view," said Raffaella Tenconi, analyst at Dresdner Kleinwort.
Monday's forecast will provide some guidance to the European
Commission which will give its recommendation on May 7 on
whether Slovakia should join the euro next year, following the
example of other EU newcomers Slovenia, Cyprus and Malta which
have all joined the single currency area.
EU finance ministers will take a final decision in June.
"Since the last quarter of 2007, rapidly growing food and
energy prices have resulted in gradually rising HICP inflation,
which is expected to peak in the third quarter of 2008," the
Commission said on Slovakia.
"Favourable base effects at the end of 2008 should
ensure some moderation in the inflation rate, especially if
second-round effects are kept in check and there is no further
surge in commodity prices at the world markets."
STRONG GROWTH
Slovakia's government and central bank are optimistic about
their euro bid although European Central Bank sources have
previously said the ECB is concerned about its inflation.
The ECB will issue a separate report on Slovakia's readiness
for the euro on May 7, the same day as the European Commission
assessment, but its findings will not be binding under EU rules.
Slovakia at the moment meets all the euro zone entry
criteria on inflation in nominal terms, budget deficit, public
debt, long-term interest rates and currency stability.
Slovakia's 12-month average inflation was 2.2 percent in
March, comfortably below the permitted ceiling of 3.2 percent.
Under EU rules, a country wishing to join the euro must have
inflation no higher than 1.5 percent percentage points above the
average of the three EU members with lowest inflation rates.
But the EU treaty also says the inflation criterion has to
be met in a sustainable way, casting some doubts about
Slovakia's bid.
Future inflation trends are not easy to predict and the
Commission is keen to avoid another forecasting embarrassment
after it deemed in 2006 that Slovenia's inflation was
sustainably low, only to see Slovenian price growth take off in
2007 to a record high in the euro zone, EU sources have said.
The Commission also forecast Slovakia would have the highest
economic growth rates among the EU's 27 nations, with gross
domestic product expected to expand by 7.0 percent in 2008 and
6.2 percent in 2009, compared with 10.4 percent last year.
It said that despite a strong appreciation of the crown
currency, Slovakia's exports are expected to outpace imports,
although overall economic growth will be driven mainly by
domestic demand.
Slovak Prime Minister Robert Fico said on Monday his
government would seek to negotiate as strong as possible a
conversion rate for the planned 2009 euro adoption.
(Editing by Gerrard Raven)
