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Slovakia passes euro inflation test

Slovakia passed the nominal inflation test for joining the euro zone in March, leaving an uncertain outlook for future price growth as the single obstacle for the approval of its bid to join the single currency next year.

Slovakia’s 12-month average inflation was 2.2% in March, comfortably below the permitted ceiling of 3.2%, figures from European Union statistics office Eurostat showed. The European Commission will say on May 7 whether Slovakia, which joined the European Union in 2004, can adopt the currency now shared by 15 nations. March was the last month in the 12-month period set for assessing Slovakia’s readiness to adopt the euro in 2009. Slovak inflation calculated using European Union methodology was 0.3% on the month in March, raising the annual rate to 3.6%, the highest since December 2006, from 3.4% in February.

The year-on-year figure exactly matched inflation in the euro zone, which was revised up from a preliminary reading of 3.5%. Inflation was the key challenge for Slovakia in its ambition to adopt the euro as the first of the four largest ex-communist EU members in central Europe. The worries over the inflation outlook stem from the fact that many poorer EU countries catching up with the core of the euro zone have been able to keep inflation low with the help of appreciating currencies which cut prices of imported goods.

Countries, that have fixed their currencies have seen their inflation rise, such as the Baltic states and new euro zone member Slovenia. The sustainability of low inflation is considered a necessary condition for euro adoption, because policymakers have very limited room to correct price swings when they give up their independent monetary policy. “The key debate will include the impact of the strengthening Slovak crown against the euro on inflation,” said Jaromir Sindel, economist at Citibank in Prague. “The European Central Bank might turn slightly negative because of this, but it has only an advisory role ... I think the politics (supporting Slovak entry) will prevail,” he said. Sindel added that Slovakia, whose economy soared by 10.4% last year, should revalue the koruna currency prior to fixing the koruna irrevocably to the euro later this year to limit the future inflation pressure. The koruna currency showed little reaction to the data, trading at 32.315 to the euro at 0908 GMT, from 32.29 ahead of the release.

The EU has urged Slovakia to tighten fiscal policy to counter price pressures that may arise after the country gives up its independent monetary policy. The Slovak government of leftist leader Robert Fico has responded by cutting the ceiling for the 2008 public finance deficit and setting a more ambitious fiscal plan for 2009-2011. (Reuters)