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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 at its 13th Meeting held on 27 March 2007 discussed and approved the Situation Report on Monetary Development in the SR in February, which confirmed the present trend of inflation decreasing and continuation of the dynamic economic development.

The slowing of inflation continued in February on a year-on-year basis. The published structure of the economic growth was in line with the NBS´s  expectations in the last quarter of the previous year when the net export was the main source of economic growth. Labour productivity development continued to move ahead of wages growth. The favourable development of the export performance of the economy in the second half of the year 2006 was reflected in the January development of foreign trade which reached a considerable surplus. Owing to this fact, an opening is created for decreasing of the interest rates of the NBS. For that reason the Bank Board of the NBS decided on decreasing the set levels of interest rates as follows: the overnight sterilisation rate set at 2.50%, the overnight refinancing rate set at 6.00% and the limit rate for two-week repo tenders with commercial banks to 4.50%, effective from 28 March 2007.

In its decision-making, the Bank Board of the NBS considered the following factors.

Inflation, measured by the Harmonized Index of Consumer Prices, slowed in February as compared with the previous month, which was in line with the NBS´s  expectations. Development of inflation was affected by the deceleration of the year-on-year growth rate in industrial goods prices, affected by favourable development in energy prices as well as by slow-down of the growth in foodstuffs prices. Inflation, regarding services, stagnated on a year-on-year basis.

The Statistical Office of the Slovak Republic released data on the GDP development for the 4th quarter of the year 2006, the growth rate and structure of which did not differ significantly from the NBS´s expectations. Development of GDP, in real terms, was pro-growth influenced by a more dynamic export of goods and services when compared to their import. For this reason, the net export in 2006 reported, on contrast to the previous year, a positive contribution to the growth of the economy. In January, the growth rate of export reached a high value, which is confirmation of the NBS´s expectation regarding the continuing growth of the export performance. Owing to this fact, the trade balance reached a high surplus in January. The further increase in January of the growth rate in receipts and industrial production, although, mainly in machinery and transportation equipment, indicates that the development of the economy and trade balance should continue its favourable development in the future also.. With regard to the fact that last year the employment growth rate was comparable with the year 2005, a high economic growth was created mainly through the increase of labour productivity. As positive can be considered the fact that this was not reflected in the dynamic growth of wages. Development of final consumption was only slightly higher when compared to the year 2005, which was clearly caused by the growth of final consumption of public administration in the first half of 2006. Generally, it is clear from the structure of the growth of the economy that this was created by the growth of production abilities.

The central rate of the Slovak koruna to the euro was revalued by 8.5%,effective from 19 March, following the agreement of all interested parties. Consequent evaluation of the exchange rate can be characterized as not corresponding to the economic fundamentals.

Within the discussion to the Situation Report on Monetary Development in the SR, the Bank Board came to the conclusion that no further pro-growth risks were identified in the inflation, owing to the fact that economy development was in line with NBS´s expectations and at the same time was created by the growth of its potential. Thus it does not represent a source of apearance of demand-pull inflation pressures. This enabled a change of monetary policy setting through decreasing of interest rates.

On 27 March the Bank Board of the NBS voted on the proposal to decrease the set levels of the NBS´s interest rates as follows: out of 9 appointed members of the Bank Board of the NBS, 7 members voted for the decreasing, 1 member did not vote.

Jana Kovacova
Communications Section

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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