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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 the Situation Report in the Slovak Republic in November and the Medium-term Forecast till the end of 2010. During its discussion, the Bank Board of the NBS concluded that the inflation slowed in accordance with the expectations affected by the prices of foodstuffs and fuels. The development of regulated prices in transport and gradual reflection of the growth in prices for heating by individual heating plants had a pro-growth impact on the inflation development. In the next months we anticipate continuation of slowing growth in prices.

The Statistical Office of the SR published the data regarding real economy and labour market developments for the third quarter of 2008 which are in line with the central bank´ s estimates. Deceleration in the GDP growth rate was affected by attenuation of direct foreign investments effect within car and electrotechnical industries on the Slovak Republic export and for the time being, it was not influenced by the impact of slowing foreign demand. It is also evident in the growing rate of employment of the given quarter of the year. This influence should show itself as late as in the next quarters of the year. Foreign trade development reported a positive balance in October, however with the concurrent decrease in the dynamics of both, export and import.

In November, a decrease in consumers´ confidence indicator was shown, of which, jointly with the demand development in the countries of our trading partners, we may assume that the the financial crisis will be affecting also the Slovak economy development in the forthcoming months. For this reason, the NBS expects deceleration of the GDP growth within the Medium-term Forecast by almost 2 percentage points in 2009 (as compared with the previous forecast). This assumption is based on the direct impact of foreign demand decline without having a major influence through the channel of worsening conditions in the area of financial intermediation. A slowdown in economic growth by means of a negative influence on export branches should reflect also in the employment and wages developments where a deceleration of their dynamics, both, the current and the one compared with the previous forecast, is expected. So far, however, there was a slight increase of unit labour costs in the third quarter of 2008, particularly, as a consequence of decrease in labour productivity dynamics. In the following period, the NBS is expecting a certain slowdown of the above dynamics and therefore, it notifies of the fact that the wages development should be tuned accordingly and decelarate the growth of wages adequately.

In compliance with the ECB assumptions which the NBS included into its Medium-term Forecast, as it became the part of the predicting process within the ECB, a recovery in foreign demand with a favourable impact on the Slovak economy should occur in 2010.

In this period, the Medium-term Forecast is linked with a large degree of uncertainty, since it is difficult to estimate the duration and intensity of the financial crisis effect. At the end of first quarter of the year, the NBS will revise the Medium-term Forecast and as there will be some monthly statistics data available, these could more clearly signalize the size of the global growth decrease and its impact on the Slovak economy.

With respect to the fact that the Slovak Republic will become a part of the euro area on 1 January, and the monetary policy will be conducted by the ECB the NBS will no more publish any rationales within its former Situation Report, the aim of which was to clarify the reasons behind the NBS´s decisions on the set levels of the NBS interest rates.

The NBS will be releasing monthly reports on economic development, however, in a shorter version. The Medium-term Forecasts will be released on quarterly basis, and their timing will be harmonized with the ECB predicting process.

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.

From 1 January 2009, the official interest rates in the Slovak Republic will be the ECB (Eurosystem) interest rates, i.e. the interest rate for the overnight sterilization transactions will increase to 2 % and that of the overnight refinancing transactions will decrease to 3%.

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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