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Slovak February inflation slows, suggesting rate cut

Slovakia's inflation rate fell in February as the effect of last year's increases in energy prices waned, boosting chances the central bank will cut interest rates.

The rate dropped to 2.7%, the lowest since September 2005, from 3% in January, the Slovak Statistical Office said in an e-mailed statement in Bratislava today. Consumer prices rose 0.2% from January. The figures matches the median forecast of nine economists surveyed by Bloomberg.

Lower energy prices and the strong koruna are curbing consumer-price growth, even as the economy expands at the third-fastest rate in the European Union. That indicates the nation may slow inflation enough to adopt the euro in 2009 and cut rates for the first time since March 2005, economists said. „The benign inflation outlook will provide the central bank room to reduce interest rates,” said Miroslav Plojhar, an economist at Citibank AS in Prague.

„The timing of the first rate reduction depends mainly on the development of the koruna.” The koruna fell to 34.11 against the euro by 9:55 a.m. in Bratislava from 34.02 at the close yesterday. The currency, which is 10% stronger than a year ago, has pared some gains since rising to a record-high 33.82 on March 8.


Plojhar said the central bank will probably start trimming its benchmark two-week rate, currently at 4.75%, in the middle of the year. Still, should the koruna strengthen „significantly” below 34 against the euro, the first rate cut by up to half a percentage point could come as early as this month, he added.

Rising the most were the costs of running a household, which were up 0.8% from January, driven by rent and maintenance costs. Food prices, which have the biggest weight in the basket used to calculate inflation, advanced 0.3%. Prices of transportation and shoes and clothing fell 0.7%, the most in the basket.

Economists such as Lubomir Korsnak at Unibanka AS in Bratislava said oil prices remain the main risk for the nation's inflation outlook. Wage growth, which the central bank cited as a reason along with oil prices for increasing borrowing costs last year, has slowed and no longer represents a threat, he added.


Inflation will probably fall to 2.2% by December, he estimates. Measured by EU methodology, the so-called harmonized inflation will fall below 2%, meeting the central bank's original target, Korsnak said. In January, harmonized inflation dropped more than the national measure to 2.2% from 3.7% in December.

The central bank in its latest quarterly inflation outlook cut its estimate for the December rate to 1.5% from 2.6%. February core consumer prices, which exclude the effect of changes to regulated prices and indirect taxes, advanced a monthly 0.3%. The annual core rate fell to 2.5% from 2.9%. (Bloomberg)