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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 on the Monetary Development in the Slovak Republic in March, as well as the Medium-term Forecast to the end of 2010.

Based on the latest monthly data, the Bank Board of the NBS concluded that the development of inflation in March did not vary significantly from the NBS´s assumptions. Consumer prices continued to grow and in comparison with February foodstuff prices increased their year-on-year dynamics: and particularly prices for services. This development, however, was not related to demand pressures, but was influenced by the development of energy and foodstuff prices. In March, regulated prices for heating also increased, as did also prices for fuel. The increase of inflation in the SR was comparable to the growing prices in the euroarea, which were also influenced by cost factors. Monthly data on receipts and production reported growing dynamics, which can be the result of a greater estimated increase of production abilities last year than expected. Also in this connection, the trade balance reported a surplus in February. The exchange rate development was affected by the situation in the world financial markets which was reflected also in the development of the regional sentiment of short-term investors. At the same time the NBS Bank Board also approved the Medium-term Forecast to the end of 2010. Both on the basis of real economy in 2007, as well as regarding a dynamic production growth in individual sectors, a slightly faster growth in the economic performance is estimated for this and the next year. Regarding the estimated favourable development of productive abilities of the economy, currently, there are no signals for its overheating . The assumption of slowing dynamics in GDP in the medium-term horizon remained, however, in comparison with the January prediction, unchanged. The real economy development prediction is henceforward based on the prerequisite of sound economic growth with a balanced contribution of domestic demand, as well as of net export. Nominal wages development does not show any major change from the previous prediction assumptions, as their growth should be covered by the growth in labour productivity. The medium-term inflation prediction should be affected particularly by the development of energy and foodstuff prices, while, in comparison with the January medium-term prediction, there should be a moderate increase in the year-end dynamics of consumer prices in 2009. Towards the end of a horizon prognosis, we assume a continuation of the real convergence, and the effect of excise duty and the one of rounding-off prices after the adoption of the common currency then should be missing in the price development. During the discussion on the Medium-term forecast, the Bank Board concluded that regarding development so far, and in connection with the latest information, there was no deepening of demand risks in the estimated inflation development. The same risks as in the January prediction persist in oil and foodstuff prices. These are however risks in the area of cost push inflation which would influence the price development also in the neighbouring countries, therefore, they do not constitute a danger for the sustainability of inflation development in the Slovak Republic. Also, regarding the following planned consolidation of public finance, a dampening of demand inflation impulses should occur. The risk henceforward remains the development of wages and the situation on the labour market, where it is necessary to ensure a moderate wage development, particularly in the public sector, and to take further actions to increase the mobility and motivation of the labour force. With regard to the fact that growth of inflation is formed by cost factors which constitutes a global impact on price development also in the neighbouring countries, the Bank Board of the NBS decided on leaving the key interest rates on the current level.

The Bank Board decision was also influenced by the fact that the macroeconomic development estimates in the medium-term horizon, do not significantly differ from the previous prediction, particularly in the risks of the demand pulled inflation.

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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