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Rationale behind the decision of the Bank Board of the NBS on the set levels of the NBS interest rates

The Bank Board of the NBS discussed and approved the Situation Report in the Slovak Republic in June and the Medium-term Forecast for the period till the end of 2010. In connection with the current monthly data the Bank Board of the NBS concluded that the inflation development in June only slightly differed from the NBS´s expecations. An increase of consumer prices was connected above all with the development of energy and foodstuffs prices. Within energy prices, mainly fuels prices increased. Their development begins to gradually reflect itself in prices of some services during the year 2008. In the development of tradeable goods prices there is not possible to follow a reflection of exchange rate development from the previous period. Monthly indicators of labour market statistics indicate a continuing of a relatively significant contribution of a final consumption to the efficiency of the economy. The trade balance surplus in June supported expectations of more balanced structure of economic growth in the next period. The development of financial indicators in the trade continues to indicate ongoing orientation of the households to the realization of consumer intentions. The approved Medium-term Forecast for the period till the end of 2010 is based on the assumption of the converging economy and it takes into account the current macroeconomic development. In comparison with the April forecast, it assumes the moderate acceleration of the growth of economy, employment, wages, but also a higher inflation, primarily due to the global cost factors – energy and foodstuffs. The dynamic growth of production of individual sectors will be connected to the intensive use of production capacity but also to an increase of disposable pensions of households. The assumption of slowing dynamics in GDP in the medium-term horizon, as well as the pro-growth impact of net export and domestic demand remained, however, in comparison with the April prediction, unchanged. In the medium-term horizon the prediction assumes the gradual impact of the recent exchange rate development on the economy with a dampening effect on the development of labour market, trade balance as well as the whole economic performance. This development should be reflected particularly in 2009 in prices for goods and services. After the euro adoption, prices for goods should be influenced also by simplification of trade and price comparison. Prices for services will be influenced by the development of regulated prices as well as the ongoing convergence. In comparison with the previous prediction, the NBS expects just a moderate increase of inflation in 2009 and stabilization of its development in 2010. During the discussion on the July medium-term prediction, the Bank Board of the NBS concluded that in connection with the expected development there are some risks to the macroeconomic development. Risks in prices for energies and foodstuffs persist. The NBS will monitor secondary effects caused by a global increase in prices of commodities. With regard to the current development, also the labour market represents a risk to the Medium-term Forecast. It will be particularly important to take note of the relation between the development of wages and labour productivity in individual sectors, as well as the wages development in the public sector. Considering that after the analysis of the current development the cyclical position of the economy was not reassessed in more detail, and with regard to the fact that the June increase in prices was comparable with the development of inflation in the euro area where increase in prices was also influenced particularly by cost factors, the Bank Board of the NBS decided not to change the interest rates in the environment of restrictive effect of the exchange rate and approaching entry to the euro area. During the Bank Board discussion on the set levels of the NBS interest rates, there was no proposal on changing the interest rates submitting by members present.

Jana Kovacova
Spokesperson of the NBS

National Bank of Slovakia
Communications Section
Imricha Karvasa 1, 813 25 Bratislava, Slovak Republic
Tel.: +421-2-5787 2161,+421-2-5865 2161, +421-2-5787 2166, 421-2-5865 2166

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