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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 discussed and approved the Situation Report on the Monetary Development in the Slovak Republic in May, paying attention to the expected development of inflation and the latest data from the real economy and labour market.

The development of consumer prices in May continued its increasing of the year-on-year growth rate. The Bank Board of the NBS concluded that cost-push factors prevail in the inflation development for the time being. These are connected with the increasing in energy and foodstuffs prices. The GDP growth was in line with the NBS´ s expectations, while the domestic demand showed a more considerable contribution. With respect to stabilizing retail receipts and increase in industrial production in April it is possible to expect the change in the GDP structure in the next period. Also due to this fact the Bank Board of the NBS decided to leave the interest rates unchanged.

In its decision-making, the Bank Board of the NBS took into account the following factors:

The inflation development measured by the harmonized index of consumer prices, as in the euro area, accelerated its growth. When compared with the NBS´s expectations, the foodstuffs and energy prices showed a higher increase. Within services, with the exception of prices in the health service sector, the prices of those services which are affected by the cost-push factors increased on a year-on-year basis.

The real economy development for the first quarter of 2008 indicated a relatively fast growth rate of domestic demand which was affected by the final consumption of the households and by to some extent the creation of reserves. At the same time there was a decrease in rate of savings, which had, together with a dynamic development of wages and increase of employment, an impact on the growing consumption of households. The labour productivity in the whole economy was behind the growth rate in wages and the unit labour costs considerably increased when compared with the previous year. This is not possible to consider a risk factor of the inflation if such development would persist also in the next period. From the point of view of individual sectors, a considerably dynamic growth rate of wages was shown mainly in the public sector. This development was also distorted to some extent by the shift in the increase of wages in the public sector from July to January 2008.

From the monthly data on receipts development, above all in industrial production and in connection with the creation of the reserves in the economy (mainly that of unfinished production) it can be seen that export development should continue to grow with a positive impact on the trade balance. In contrast, in the area of retail sales receipts, there is a deceleration in the growth, which could indicate an attenuation of the households´ final consumption in the next quarter of the year.

After the revaluation of a central parity effective from 29 May 2008, the exchange rate development was stabilized.

On the basis of the latest data regarding economy and inflation development we can conclude that the current and anticipated macroeconomic development is in line with the NBS´ s expectations so far, while until now there has only been a considerable influence of cost-push factors in the development of consumer prices. In order the inflation development is not negatively affected also by demand-pull factors, it is inevitable to decelerate the growth rate in wages, above all in the public sector. With respect to the increase of inflation risks, the exchange rate development acts in the last period restrictively on monetary conditions and with respect to the anticipated entry to the euro area in 2009, the possibility to use other monetary policy instruments is already limited.

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 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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