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Slovakia: October 2008

Wed, Oct 8 2008, 08:30 GMT
by Mária Valachyová

Erste Bank der oesterreichischen Sparkassen AG

Price development and real economy

After following an upward trend for the past eight months, the inflation rate will likely decline in September to an annual rate of 4.8%, down from 5.0% in August. The seasonally lower prices of vegetables and lower prices of oil should help to contain growth in cigarette prices in September. Outlook for the final quarter of the year depends on whether the regulatory body okays the hike in energy prices for households (demanded by the gas distributor) or not. Although the oil price development justifies a hike (the gas prices have not been changed since January 2007) the political preference for zero growth in energy prices for households might win. In later case, the inflation rate would gradually decline to 4.6% at the year-end. In former case, which remains our main call (gas +10%, heat +6% before the yearend), the inflation would increase to 5.1% in December.

August industrial production will be interesting to watch for any signs of slowing external demand in hard data. After slow growth in June, which was into large extent caused by unfavorable base effect, we expect the industry to pick up in August and grow by solid 7 % y/y. In line with that we assume relatively small trade deficit in August, at SKK -1.6bn.

Koruna and monetary policy

The koruna stayed near the level of 30.35 SKK/EUR during September and will gradually converge towards its predefined conversion rate of 30.1260 SKK/EUR by the end of the year. Monetary policy takes direction from the ECB steps now. In the light of slowing growth in the Eurozone and declining inflation risks (due to lower oil prices) the ECB might cut its key interest rates earlier than we expected before, at the end of this year or at the beginning of 2009. That would not necessarily mean lower market rates in Slovakia as the Slovak money market rates will have to converge to the European rates by the year-end. Currently, the Slovak rates are well below the European rates due to liquidity strains in Europe (3M Bribor stands at 4.3% while European 3M Euribor at 5.4%).

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Published on  Wed, Oct 8 2008, 08:41 GMT