1993-1999 (independent MP of the NBS)

Since 1993, the independent monetary policy of the NBS continuously followed the monetary policy of the State Bank of Czechoslovakia from previous years 1990-92, which quantitatively managed the monetary developments via money supply. The conduct of monetary policy was based on the regulation of M2 monetary aggregate through monetary base. The main objective of the monetary policy of the NBS was to achieve currency stability by reducing inflation and maintaining a fixed exchange rate of SKK (Slovak koruna) within a fluctuation band of ± 0.5 %, while the fixed exchange regime (exchange rate was pegged to the so-called Slovak koruna currency basket) served as the nominal anchor for the development of inflation. Direct and indirect monetary instruments were: credit limits (a form of administrative control of bank lending), open market operations (OMO), reserve requirement (RR), the discount rate, the lombard rate, promissory note operations and the function of lender of the last resort. After the currency separation of Slovakia and the Czech republic in February 1993, growing expectations of devaluation led to the devaluation of the SKK exchange rate with respect to freely convertible currencies by 10 % on July 10.

In 1994, the NBS changed the composition of the SKK currency basket from the five-component to two-component basket (60 % DEM and 40% USD). The importance of standard indirect market instruments was growing, in particular the auction lending facility (ALF).

In 1995, convertibility of the SKK on the current account of the balance of payments was introduced in accordance with Article VIII. of the IMF agreement and the Payment agreement of Czech republic and Slovakia was cancelled.

In 1996, the development of financial markets led the NBS to refrain from the use of lending limits and to become more active in using the operations backed by securities and standard OMO that became dominant. Significant persistent excess liquidity in the banking sector forced the NBS to use the sterilizing instruments for the first time and to issue its own treasury bills. High government deficits, expansion of lending, especially in foreign currency, increased the dynamics of the money supply as well as the sensitivity of the agents to the exchange rate fluctuations. NBS long-term effort to create conditions for the transition to a qualitative monetary policy management was interrupted by negative trends in the economy. In July, the monetary instruments setting had to be adjusted: lombard rate was increased to 15 %, reserve requirement from primary deposits increased to 9 % with surplus reserves interest rate of 1.5 %. The measure „Foreign exchange position of commercial banks for monetary purposes” (FPMP, reserve requirement for the deposits of non-resident banks) was introduced in order to control the credit expansion in foreign currency and the SKK fluctuating band was widened to ± 5 % with the aim of discouraging the short-term speculative capital.

In 1997-1998, the standardization of NBS monetary policy instruments continued with OMO (REPO tenders) being the dominant instrument. It was the intention of the NBS monetary policy to support external stability of the currency and favourable development of inflation through the reduction of foreign trade imbalances. Interest rates were gradually reduced, public sector and private companies continued to incur domestic and foreign debt. In January 1998, the NBS widened the fluctuation band for the SKK exchange rate to ± 7 %. Financial crises in Asia and Russia contributed to the downgrade of the Slovak rating, as Slovakia showed significant macroeconomic imbalances in the years 1996-1998 with the government investment financed by loans promoting domestic consumption and economic growth unsustainable in the long term. The double deficit (fiscal and trade) reached extreme values, the trade deficit and the current account deficit was above 10 % of GDP, which led to destabilization of the economy. Defending of the exchange rate by the reduction of the foreign exchange reserves of the NBS was unsustainable and after the parliamentary elections in September 1998 the situation resulted into the changing of foreign exchange regime. From 2 October 1998, the Slovak koruna became a currency with floating exchange rate with DEM as a reference currency, later with euro. Liberalization of the foreign exchange regime continued by abolition of the bidding obligation.

Since 1998, the NBS exchange rate policy moved to a floating exchange rate of the Slovak koruna that was determined by the supply and demand in the foreign exchange market. Until the ERM II entry in 2005, managed floating regime was employed. In case of exceptionally sharp fluctuations and excessive volatility of the exchange rate of the Slovak koruna, NBS declared to enter the foreign exchange market and intervene in favor or against the SKK. NBS intervened in the foreign exchange market through direct intervention or through direct transactions with banks on their demand. NBS was increasingly forced to sterilize excess liquidity of commercial banks mainly due to the privatization of banks, strategic companies and FDI inflows. NBS interventions in the foreign exchange market against the strengthening of the koruna have decisive impact on the growing volume of sterilization.

The year 1999 represented a period of stabilization as, after the abolition of FPMP, the NBS monetary policy was implemented exclusively through indirect instruments. REPO transactions in the form of an auction (REPO tenders) remained the main instrument that was used in this period. In the first half of 1999, the depreciation pressures on the SKK exchange rate emerged mainly due to the absence of strict fiscal policy. After the first round of the presidential elections, the NBS intervened in the market to stop the weakening of the SKK exchange rate. The government adopted a so-called package of measures, proceeded to a rise of regulated prices, significantly reduced public investment and introduced import fee. By the end of the year, the state the process of restructuring the loan portfolio of selected commercial banks (VUB, SLSP, IRB), that were later sold to foreign owners. Bank restructuring led to lower interest rates on loans. Entry of investors secured healthy growth of bank lending and foreign know-how. Inflation reached double digits, but the adopted government measures stabilized the exchange rate and paved the way for the gradual reduction of interest rates. The year 1999 was a turning point, as the improvement in the fiscal deficit and in particular the reduction of the trade deficit (to around 5 % of GDP) brought macroeconomic stabilization of the economy. Monetary policy aimed to stabilize the monetary environment, i.e. especially to influence the price stability and to prevent the spread of inflation from regulated prices to the prices of other goods and services.