Tuesday, August 28, 2007

Slovak Central Bank Keeps Rates on Hold

From Bloomberg this morning:

Slovak Central Bank Keeps Rates on Hold for 4th Month

By Radoslav Tomek and Andrea Dudikova

Aug. 28 (Bloomberg) -- The Slovak central bank kept its benchmark interest rate unchanged for a fourth month to cap inflation as the nation prepares to adopt the euro in 2009.

The bank refrained from lowering the 4.25 percent two-week repurchase rate at its monthly meeting today, spokesman Ivan Jurko announced in a conference call with journalists. The decision was predicted by all 18 economists surveyed by Bloomberg. The central bank will hold a press conference at 1:30 p.m. in Bratislava, Slovakia.

Slovakia plans to be the second former communist nation to adopt the euro after Slovenia did so in January. The central bank must keep borrowing costs unchanged in the coming months, following two cuts this year, as risks remain that inflation may spike, economists said.

``The economy is growing at the fastest pace and this will fuel labor-market tensions,'' said Robert Prega, an economist at Tatra Banka AS in Bratislava. ``Inflation is set to rise next year, so there are no reasons for another rate cut.''

An improving inflation outlook prompted the National Bank of Slovakia to trim its benchmark rate by a half-point this year, as policy makers sought to halt the appreciation of the koruna by making money market yields less attractive for foreign investors. The recent weakening of the koruna has removed an argument for another rate cut, Prega said.

Koruna Rate

The koruna was trading at 33.743 against the euro at 12:37 p.m., little changed from the yesterday's close of 33.764. The currency has pared some gains since reaching a record in March, although it is still about 12 percent higher on the year, helping to cut the annual inflation rate.

The central bank expects to meet the inflation test for euro adoption as early as this year, though it needs to maintain a ``very cautious'' monetary policy, board member Peter Sevcovic said after the previous monetary-policy meeting on July 31.

The central bank forecasts the inflation rate will rise to 2 percent next year and 2.5 percent in 2009 from 1.5 percent estimated for December 2007 as price growth will no longer be tamed by koruna's appreciation.

The bank will therefore keep its benchmark rate steady throughout this year and may raise borrowing costs next year, should the ECB lift its two-week rate above the Slovak level, economists said.

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