Inflation

What is the current inflation situation in Slovakia and the euro area?

• Prices of goods and services in Slovakia continue to rise noticeably faster than the euro area average, largely due to recently adopted fiscal consolidation measures.
• After falling sharply in 2024, Slovakia’s headline inflation is expected to accelerate this year due to the VAT increase, the new sugar tax, and other government consolidation measures.
  We expect the headline rate to average 4.3% in 2025, up from 3.2% in the previous year.
• Inflation is projected to slow to around 3% per year in 2026 and 2027, assuming that household energy prices remain frozen. If the government raises them, inflation will be higher.
• Consumer prices surged from December to January, as expected, and continued rising in February. Food prices and administered prices increased, as did prices of services, including activities on which VAT was reduced from January of this year, such as accommodation and restaurants. The increase in the base VAT rate is only gradually being passed on to goods prices.
• Annual inflation, as measured by the European Union’s methodology, eased slightly from 4.2% in January to 4.1% in February. Slovakia’s headline rate remains one of the highest among the 20 euro area countries. Meanwhile, average inflation in the euro area slowed from 2.5% in January to 2.3% in February.
• According to the national methodology, which serves as the basis for domestic wage and price negotiations, Slovakia’s inflation rate was slightly lower than the EU measure, easing moderately to 3.8% in March.
• Domestic inflation developments are not altering expectations of a gradual slowdown in euro area inflation. While the European Central Bank (ECB) may continue cutting its key interest rates, it has not committed to doing so and will base its decisions on incoming economic data.
• Any further easing of monetary policy is expected to pass through to interest rates on mortgages, consumer credit, and loans for fixed investment. The extent of this impact will be determined by commercial banks.

The European Central Bank’s response to inflation

• The main policy rate has been reduced to its lowest level in two years.
• The ECB’s Governing Council continued to cut its key interest rates in March, reducing them for the sixth time since last summer.
• The ECB’s decision is based on a favourable outlook for euro area inflation, which is projected to reach the 2% target early next year.
• Following the series of interest rate cuts, monetary policy is now far less restrictive for the euro area economy. However, trade wars could dampen exports and slow economic growth in the euro area.
• Future monetary policy decisions will continue to be based on incoming economic data, with no pre-commitment to a particular rate path.
• The absence of such a commitment means further rate cuts are not guaranteed.
• If economic data indicate a need to pause rate cuts, the ECB will do so.
• Given the considerable uncertainty facing the economy, the ECB must remain vigilant and agile in assessing incoming data.