No big need for rate hike: Slovak cbanker

By Peter Laca

VIENNA (Reuters) - Slovak EU-norm inflation has picked up more than expected due to food price growth, but there is no big need to tighten monetary conditions, central bank (NBS) board member Ludovit Odor said on Tuesday.

Speaking at the Reuters Central European Investment Summit, Odor said he believed Slovakia was on track to meet the inflation condition for euro adoption, which the ex-communist European Union member targets for the beginning of 2009.

"(Monetary conditions) are in a tighter zone, so basically we are a little bit tightening policy conditions mainly because of the exchange rate channel," Odor said.

"I would say that at this moment I do not see some huge need to tighten very much the monetary policy conditions because I think that they are close to some optimal level at this stage."

Slovak EU-norm inflation jumped to 1.7 percent on an annual basis in September, from a historical minimum of 1.2 percent booked in both August and July, above market expectation of a 1.6 percent rise.

"This is not a big surprise, that food prices were behind the rise. But the magnitude (of the rise) was a little bit of a surprise for the central bank," Odor said.

"It seems to us that this trend could continue in the coming months ... This could be translated into the new forecasts of the NBS which will be released very soon. We expect to revise our forecast at least for the next two years."

Odor said a good way for Slovak monetary policy would be to leave the key two-week repo rate at the current level of 4.25 percent and let the euro zone rates, now at 4.0 percent, converge ahead of euro entry.

However, the outlook for euro zone rates has softened due to the global credit crunch and many analysts expect the ECB to leave rates flat for the time being.

EURO ON TRACK

Slovakia is likely to see higher inflation in the future but Odor said it was natural phenomenon for a converging economy and should not disqualify Slovakia from the euro zone entry.

"Of course, if you expect catching up in real terms, you also have to expect catching up in nominal terms. So we will have higher inflation than the euro zone, but this inflation will not be very high compared with the euro zone average."

The rise in the cost of food should not negatively affect next year's assessment of whether Slovakia meets the price growth condition for euro zone entry sustainably, as a similar trend was seen in other countries because of the whether conditions.

Slovakia has experienced accelerating economic growth in the past few years and the 2007 gross domestic product rise is expected to surpass last year's record growth of 8.3 percent.

Odor said there were no dangerous inflationary pressures in the fast-growing economy that would require central bank action.  Continued...