Slovakia: Monthly forecast
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Price development
Wed, Nov 8 2006, 15:29 GMT
by Mária Valachyová
Erste Bank der oesterreichischen Sparkassen AG
Price development
October inflation saw a significant decline to 3.6% in our view, down from 4.6 % in September (in national CPI measure), due to base effects (energy prices increased by 4.4% in October last year adding 1pp to inflation, while this October only prices of heat will go up adding only 0.1pp to CPI). In addition, prices of fuel declined by 5% in October. Core inflation (ex regulated prices, food and fuels) should slightly decline to 2.6% y/y from 2.7% seen in September. While prices of gas will increase in November by 4%, they should according to the recent local news decline again in January by 3%, which makes outlook for the next-year inflation brighter (we and the NBS counted with an increase of gas prices in January 2007). End- 2007 inflation should thus reach 2.2% instead of our earlier estimate of 2.5%, coming closer to the target of the NBS defined as 2%. Nevertheless, the central bank continues to identify up-side risks to inflation from demand pressures (given wage and employment growths), which justifies our expectations of one more small interest rate hike till the end of the year.
Real economy
On supply side, industrial production sustained a strong double-digit growth pace at the end of the third quarter (we estimate 13.2% y/y pace), fuelled by strong external demand from the Euro zone, which should also transfer into the narrowing trade deficit in September (over the previous month). Domestic demand likely posted another strong growth in September. While we estimated 8.3% y/y real retail sales growth, actual number might be higher, as hinted by the Eurostat's release at 10.8% y/y).
Implications for koruna and monetary policy
The NBS stayed on hold in October after raising rates in September, and at the same time has slightly “eased” its previous hawkish rhetoric. Nevertheless, monetary conditions seem to be still loose at the moment, therefore unless the koruna continues to appreciate strongly, we see the central bank as raising the interest rates once more till the end of the year. That would be the last hike before a period of stable rates in our view. After steep strengthening in the past month, when the koruna advanced by 3%, we expect profit taking to take place on the FX market and see the unit to ease back to 36.50 SKK/EUR till the end of November.
Published on Wed, Nov 8 2006, 15:33 GMT
Archive
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