The National Bank of Slovakia (NBS) dampened a sudden rush of optimism among analysts March 13 after the Slovak Statistical Office reported headline CPI (Consumer Price Index) inflation of 6.7% year-on-year, 0.3% under market expectations.
Despite immediate calls from analysts for the central bank to lower interest rates on the inter-bank market, NBS officials remained cautious in drawing any connection between the latest inflation figures and any potential drop in key interest rates.
"Inflation developed very positively in February due to lower prices of food, especially fruits and vegetables, more so than were expected. But it is going to jump in the near future, and the room for cutting interest rates is going to be limited this year, said Peter Seveovie, NBS Monetary Policy Director. The NBS has set its 2001 year-end target for headline inflation at between 6.7% and 8.2%.
Analysts said that a fall in key NBS rates, especially the two-week repo rate that currently stands at 8% [the NBS also provides banks with one day sterilising and one day refinancing rates] would be reflected in a subsequent lowering of the interest rates for loans to corporate entities, a vital lift for companies struggling in the grip of a credit crunch stagnating the corporate sector.
'Sterilisation' and 'repo' are interchangeable terms for a transaction in which the central bank buys money from banks, thus taking it out of the open market; 'refinancing' operations involve the central bank putting funds back on the bank market.
Pavol Ondriska, an analyst with Slávia Capital brokerage house, said that there was now space for a 50 basis point cut in the two-week repo rates. "There is room for a decrease from 8% to 7.5%," he said, adding, "lowering inter-bank rates should see a lowering of interest rates on loans to the corporate sector. Lower rates on loans would obviously mean lower costs for the corporate sector, which would be a great help". The average interest rates on loans to corporates over the last six months has been 11%.
Analysts expect the NBS to come up with a decision on the inter-bank rates some time at the end of the first quarter or during the second quarter of this year. The NBS board is due to meet at the end of this month to discuss monetary policy. Despite the cautious words, some experts believe that the rates will come down.
"The NBS may delay its decision on rate cuts to assess the impact of a new package of hikes in regulated prices on the inflation rate, but I have a feeling they will make a cut to the repo rates," said 1udovít Ódor, analyst at ESOB bank. He added that a package of regulated price (gas, electricity, water, state-controlled housing rent and transport) rises which took effect as of February 1 this year was expected to see consumer prices and hence March inflation figures rise.
However, he played down the size of the jump. "I think that the [effect of the rises] will be seen mainly in services, but our estimate for headline CPI inflation in March is 6.8%, so it's only a very slight difference from the February figure," he said.
Under the regulated price hikes, gas tariffs rose 20% for households, 15% for medium-sized corporate customers and 25% for large volume customers. Prices of electricity increased 15% for households and 12% for firms, while water rates were raised 20% and rail and bus fares 15% and 20% respectively.
Scepticism remains
Some analysts, though, were more sceptical about the prospects for falling interest rates, saying that the NBS's comments were evidence of a reluctance at the bank to take such a step. "It [the NBS] doesn't have the courage to lower these rates. They are afraid that if they decrease the rates now, and something happens, say at the end of this year, they will have to increase them, something they don't want to do," said Juraj Kotian, an analyst with SLSP, the former state-owned bank privatised by Austrian Erste Bank in December last year.
He added that in his opinion there had been room for a 0.25% cut in the two-week repo rate in January when headline CPI inflation was 7.7%, even though it was a full percent higher than the current figure.
But Ševčovič argued that other important factors had to be considered before any decision was made to lower interest rates. "There will be higher domestic demand this year, putting pressure on the inflation rate. Secondly, the National Property Fund is going to pay off bonds to citizens, which will only support that demand," he said. The National Property Fund is to make repayments of 29 billion crowns ($61.7 million) for its bonds from a second wave of coupon privatisation five years ago.
"We have to look at these factors, which are expected to have an effect on Slovakia's macro-economic performance this year, not just at isolated figures without putting them into the larger context," he added.
Analysts have said that the most important component in Slovakia's macro-economic performance this year will be burgeoning domestic demand, which is expected to push GDP growth from last year's estimated 1.8% to 2.2%, to between 2.8% and 3.4% this year.
Slávia's Ondriska said that the NBS's cautious attitude towards cutting inter-bank interest rates was justified. "The central bank is responsible for the development of monetary policy, and they have to act accordingly," he said.
