Czech inflation slows, record low in Romania

PRAGUE (Reuters) - Inflation eased to its lowest level this year in the Czech Republic in May and stagnated at a post-communist nadir in Romania, confirming a sharp drop off in demand in the two emerging European Union economies.

The Czech data came in below the central bank's forecast, strengthening arguments for policymakers there to cut interest rates to half a percent later this month, but Romanian officials were seen holding fire to protect the weak leu currency.

Czech inflation slowed to an annual 3.2 percent in May, from 3.5 percent in April and below the central bank's 3.4 percent forecast.

Analysts said food prices had not decelerated at the pace they had expected, but core inflation - which excludes factors such as crude oil and food prices and administrative price changes - was virtually non-existent as the troubles in the region's main export market, the euro zone, sap demand.

"It still ... opens the doors to a rate cut at the end of June. Inflation is gradually declining, and domestic demand is weak enough," said David Marek, chief economist at Prague-based Patria Finance.

In Romania inflation was steady versus the previous month at 1.8 percent, its lowest since the fall of communism in 1989.

But analysts expect the central bank to keep rates flat at 5.25 percent at least until the end of the third quarter, partly to protect the leu, which is now close to an all-time low.

"The central bank will keep interest rates unchanged until the situation calms down in the European Union, even if the evolution of inflation is supportive for another cut," said Melania Hancila, chief economist at Volksbank in Bucharest.

With Greek banks owning about a fifth of Romania's banking sector, the country of 19 million is seen as among the most exposed in emerging Europe to the euro bloc's debt troubles.

Following the collapse of a pro-austerity government earlier this year and fears of turbulence from a messy Greek exit from the euro, the leu hit a record low of 4.50 per euro last month.

Analysts do not expect the currency to recover at least before a general election slated for autumn, when a strong showing in local polls at the weekend suggests a new leftist government is set to win a clear majority.

Hungary will publish its May inflation data on Tuesday.

RECESSION BITES

The Czech Republic became the first country in the EU's eastern wing to slide back into recession last year and the latest industry and retail sales numbers suggest it will continue its slide until later this year after government austerity measures put consumers on the defensive.

Two central bank board members, including Governor Miroslav Singer, voted unsuccessfully last month to cut the official interest rate from an already record low 0.75 percent.

Since then, Singer's deputy Miroslav Hampl has said the weak growth data would intensify the debate on monetary loosening.

"It is much harder to think about anything else in the future other than further easing," he said in Poland.

Romania's central bank expects annual price growth at just above the mid-point of its 2-4 percent target band at the end of the year. However, "I see rates flat at 5.25 percent this year because of elections and pressures on the exchange rate from the international context," said Georgiana Constantinescu, an economist at Credit Europe Bank.

(Additional reporting by Ioana Patran and Jason Hovet; Writing by Michael Winfrey; Editing by Ruth Pitchford)