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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 December 2007 and the medium-term forecast to the end of 2009. Based on its latest monthly data, the Bank Board of the NBS concluded that in October also the increase of foodstuff prices continued although not so dynamically as in the previous months.

The development of the foodstuff prices in Slovakia is similar to that in neighbouring countries and the euro area. Together with pro-growth influence of oil prices, the foodstuffs represent cost factors of the inflation increase. Due to this fact this increase came to exceed the inflationary target of the NBS in 2007. However, these factors were determined to be exceptions in the inflationary target, which should be fulfilled when deducting the influence of the worldwide increase in foodstuffs and energy prices. Monthly indicators of nominal wages and production development indicate a continuing current favourable trend. The trade balance showed a higher than estimated deficit in November. Regarding the more favourable development in the previous months, the cumulative foreign trade balance is in line with the expectations when its considerable year-on-year improvement was shown. The exchange rate was volatile in December and January, and was affected by overall regional development. It was not necessary for the central Bank to make any interventions. The approved medium-term forecast for the period till the end of 2009 does not vary from the previous October forecast either in terms of the Slovak economy development or in its performance. In view of the fact that the latest medium-term prediction took into account both the foreign trade data and GDP revision, it is not possible to compare some of the figures. In general, the approved medium-term forecast implies that the 2007 performance of the economy produced close to its potential and despite its dynamic growth it did not show any overheating.

A similar development can be expected both this and next year. The situation in the labour market was stable in 2007. No excessive growth of wages or tightening of the labour market were reported. Equally as in the previous medium-term prediction the NBS expects the favourable development in the labour market will continue over the whole forecast horizon. Also, basic assumptions concerning the improvement of trade balance development and the whole balance of payment current account remained unchanged. Moderation of the GDP continued. With respect to current as well as the expected development of foodstuff and oil prices, inflation prediction for this and next year was increased. The NBS expects the fulfilment of the Maastricht criterion and the sustainability of the inflation development in the following period. When making assessment of the 2008 and 2009 inflation, the influence of rise of excise duties, as well as the estimated impact of rounding due to the introduction of the single currency, must be taken into account. During the discussion on the January medium-term prediction, the Bank Board of the NBS concluded that the overall macroeconomic development, either current or expected one, can be considered favourable. In comparison to the previous medium-term forecast, there was not any radical change as to the development of the Slovak economy.

It is assumed that the moderate wage growth will continue, while positive real wages will be sustained. Similarly to the previous medium-term prediction, there are risks in the macroeconomic development. These risks are represented by further oil and foodstuff prices development. The NBS will closely monitor possible secondary effects caused by the growth of prices of these commodities. Risks can also be seen in the development of wages and situation on the labour market. In connection with the fact that the approved medium-term prediction does not differ in principle from the previous one in terms of the existence of the demand pull pressures, and regarding also the fact that the development of inflation has been influenced by factors beyond the monetary policy influence present in the environment of the restrictive monetary conditions, there is a space for leaving the interest rates unchanged. During the Bank Board discussion on the set level of the NBS interest rates, none of the members present filed a motion to change the interest rates.

Jana Kováčová
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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