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Slovak CPI hits 14-mth high, but euro plan on track

Analysis

Slovak inflation accelerated to a 14-month peak in February on housing and food costs, data showed on Thursday, but analysts said the country remained on track to meet the inflation test for euro adoption.

Inflation, calculated by local standards, was 4.0% on the year, after 3.8% in January, the Slovak Statistics Office said. The market had expected a rate of 3.9%. Prices rose 0.4% on the month, also slightly above analysts’ forecast for a 0.3% increase. “Inflation was slightly higher than expected due to imputed rents, but this item is not included in the EU-harmonized index, so there should be no surprise,” said Tatra Banka analyst Juraj Valachy.

The central bank’s (NBS) inflation target is based on the EU-norm consumer price index (HICP) as part of Slovakia’s plan to adopt the euro next year. Imputed rents are costs for maintenance services and repairs paid as part of rents. Analysts said the different HICP make-up meant the key price gauge would be in line with forecasts for a 3.3% annual rise, also a 14-month high, when the data are issued on Friday.

The domestic gauge should also have no impact on monetary policy in the near term as economists expect Slovakia to be below the inflation threshold for euro adoption when its readiness to join the euro zone is assessed in the spring. “Slovakia will keep meeting the Maastricht (target), there is no change in that and the buffer will still be big enough,” said Silvia Cechovicova, an analyst at CSOB Bank in Bratislava. “We expect rates to remain flat until the decision on euro adoption,” she said. “Until then, the central bank’s room for maneuver room is limited. Still, they have little power to influence inflation as it’s mainly driven by cost factors.” The NBS left its key two-week repo rate at 4.25% for the 10th month in a row in February, keeping a 25 basis point premium over the euro zone benchmark.

Slovakia’s 12-month average inflation must not be more, than 1.5 percentage points above the average of the three lowest rates in the EU to qualify for euro zone entry. But any applicant also has to prove inflation will stay low over time and accelerating inflation might prompt the Slovak government to seek a stronger conversion rate for euro adoption. “This is rather a signal for the government (than for the central bank),” said Eduard Hagara, an ING Bank analyst. “The government wants a strong crown to sustain low inflation. Rising prices could motivate them to have a stronger rate, when setting conversion rate against the euro,” he said. The koruna, which hit a record high of 32.250 per euro last week, did not react to Thursday’s data. (Reuters)

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