(Updates with Slovak officials, market reaction, analyst)
By Marcin Grajewski
BRUSSELS, April 28 (Reuters) - The European Commission
forecast on Monday that Slovak inflation would ease in 2009
after hitting a peak this year, and Bratislava officials said
this boded well for the country's plan to adopt the euro next
January.
In a twice-yearly forecast, the European Union executive
said Slovakia's annual inflation would fall to 3.2 percent in
2009 on the EU measure (HICP), after peaking at 3.8 percent in
2008. This 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 European Commission forecasts confirm we are able to
meet the inflation criterion in a sustainable way in the
future," Slovak Finance Minister Jan Pociatek told reporters,
echoing comments from central bank board member Peter Sevcovic.
The Slovak crown hit an all-time high of 32.200 to the euro
<EURSKK=> on Monday, firming 0.6 percent before easing to 32.225
at 1038 GMT, above the previous all-time high of 32.250 seen in
March.
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.
The Commission will recommend on May 7 whether Slovakia
should adopt the euro next Jan. 1, following the example of
other EU newcomers Slovenia, Cyprus and Malta which have all
joined the common 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."
The Commission said euro zone inflation was expected to leap
to 3.2 percent in 2008 from 2.1 percent last year before slowing
to 2.2 percent in 2009.
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 worried about its inflation outlook.
The ECB will also report on Slovakia's euro readiness on May 7,
but its findings will not be binding under EU rules.
At the moment Slovakia meets all the euro zone entry
criteria on inflation, the 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 wanting to join the euro must have
inflation no higher than 1.5 percent percentage points above the
average of the three EU members with the lowest inflation rates.
But the EU treaty also says the criterion has to be met in a
sustainable way, casting some doubts about Slovakia's bid.
"It's broadly positive, although the forecasts don't
completely rule out a surprise decision," said Dresdner
Kleinwort analyst Raffaella Tenconi. "I'll stick with my view
(that there is a) 70 percent chance Slovakia is in, and 30
percent that they aren't."
Inflation trends are not easy to predict and the Commission
is keen to avoid another embarrassment after it deemed in 2006
that Slovenia's inflation was sustainably low. Once Slovenia had
adopted the euro last year its inflation rose to a record high.
The Commission also forecast Slovakia would have the highest
economic growth rate of the EU's 27 nations, with gross domestic
product expected to expand 7.0 percent in 2008 and 6.2 percent
in 2009, compared with 10.4 percent last year.
Despite a strong appreciation of the crown currency, Slovak
exports are expected to outpace imports, it said, although
economic growth will be driven mainly by domestic demand.
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.
(Additional reporting by Peter Laca and Martin Santa in
Bratislava)
(Editing by David Stamp)
