Over the past two business weeks, deposits with short-term maturities on the interbank money market have held relatively stable, with one-day funds moving between 10 and 16%. Longer-term deposit have been even steadier, as one-month money traded mostly between 18 and 19%, three-month deposits between 21 and 22% and six-month funds between 22 and 23%.
High accepted yields at auctions of state bonds are still the main driving force keeping longer-term deposit rates above 20%. The NBS said it considered the interest tide too high, but the Finance Ministry responded by accepting record high yields in the latest auctions of state bonds. The average yield at the April 21 auction of one-year state bonds hit 26.5%, while the maximum accepted yield was 27.95%. The ministry satisfied the entire volume of bids totalling 1.35 billion Sk.
A week later, the ministry was selling very rare two-year papers, the last auction of such state bonds having taken place in July 1995. The market smelled blood, and attacked with a vengeance. The ministry accepted bids totaling 3.46 billion crowns, almost the entire volume of submitted bids, pushing the average yield to 27.19% and maximum yield to 28.9%. The level of accepted yields means that the state will have to pay almost one billion annual interest on a 3.5 billion principal.
Following the auctions, the NBS added liquidity to the market through two-week refinancing repo tenders, eliminating the fund-draining. The central bank held three tenders in as many days (April 28 to 30), adding almost 9.0 billion crowns to the banking sector at average rates of between 16.2 and 17.2%.
High yields from state bonds, together with the closing of long hard currency positions, helped the crown firm, fixing it naturally within the 2.0% margin on the depreciation side of the currency basket parity, in defiance of the central bank's March statements that the appropriate level for the crown was between 2.0 and 4.0% on the depreciation side. The crown strengthened to minus 1.25% on April 30, with the central bank fixing it mostly at prevailing market levels.
The crown remained insensitive even to some of the main macroeconomics indicators. The Slovak Statistical Office announced that country's foreign trade deficit rose to 6.0 billion Sk last March, up from 5.09 billion in February and 5.24 billion in January. The March figure put the 1Q98 trade deficit at 16.65 billion Sk, compared to a 15.4 billion shortfall in the same period of 1997.
Some macroeconomists said the first quarter trade data indicated that the foreign trade deficit was likely to remain a problem for Slovakia throughout 1998, adding that they expected another year with a hefty current account deficit.
Consumer price inflation was 7.2% anually last March, but central bank officials said they expected inflationary pressures to ease in the second half of the year and that the year-end target of 5.6-5.9% rate was realistic. The NBS added that the gradual abolition of the import surcharge over the course of the year should be the main anti-inflationary factor in the second half of the year, and said that if food prices and the exchange rate of the crown remained stable, inflationary pressures would gradually ease off.
The surcharge fell to 3.0% at the beginning of April and will be abolished completely on October 1. The need to refinance state budget expenditures will probably not allow the central bank to decrease interbank interest rates significantly. That is why no radical movements are foreseen on the interbank money market or the foreign exchange market.
