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Unexpected interest rate cut welcomed

Slovakia's central bank has said it has given a clear signal that it intends to play its part in helping the revitalisation of the corporate sector with an unexpected cut in interest rates at the end of last year.
The December 22 announcement that interest rates were to drop 0.25% took the markets by surprise following statements from the National Bank of Slovakia (NBS) at the end of November that there would be no further cuts in interest rates in 2000.
The NBS Bank Board lowered interest rates on one-day sterilisation operations from 6.5 to 6.25% p.a., for overnight refinancing operations from 9.5 to 9.25% p.a. and for standard two-week repo deals from 8.25 to 8% p.a.


Banks such as VÚB, above, may begin to offer more loans to companies and lessen the credit crunch if the NBS can cut rates further.
photo: Ján Svrček

Slovakia's central bank has said it has given a clear signal that it intends to play its part in helping the revitalisation of the corporate sector with an unexpected cut in interest rates at the end of last year.

The December 22 announcement that interest rates were to drop 0.25% took the markets by surprise following statements from the National Bank of Slovakia (NBS) at the end of November that there would be no further cuts in interest rates in 2000.

The NBS Bank Board lowered interest rates on one-day sterilisation operations from 6.5 to 6.25% p.a., for overnight refinancing operations from 9.5 to 9.25% p.a. and for standard two-week repo deals from 8.25 to 8% p.a.

The bank itself said that it had made the cut after "consideration of the continuing favourable development of economic indicators". In a statement it added that it was loosening its monetary policy to lift "stagnating volumes of loans to businesses and thus support economic growth".

While unexpected, analysts welcomed the decision, saying that the cut was not only good for business, but economically prudent.

"This will allow companies, especially smaller ones, to get loans cheaper and easier. The main reason that the NBS made this cut is to try and stave off the credit crunch, the lack of lending by banks [to companies]," said Ľudovít Odor, analyst at Československá obchodná banka (ČSOB).

"The central bank is continuing a policy of interest rate stabilisation. The cut was the right size and can keep this stabilisation. Large cuts are usually a sign that somewhere there is [economic] instability and it is good news for the economy that there are these [smaller] cuts," added Martin Kabát, head of analyses at Slávia Capital brokerage house.

Encouraging inflation estimates from the central bank showing headline inflation of 8.4 - 8.7% and core inflation between 4.6 and 4.8% for 2000 - at the bottom end of the NBS's monetary programme targets for 2001 - have persuaded the central bank that it can drop its rates without running the risk of heavily influencing spending in the economy.

Following cuts of 0.5% in rates in late May and 0.25% in August this year the central bank had come under pressure in the last months of 2000 to lower interest rates further to hasten an end to a credit crunch which many said was stifling the business sector, preventing smaller companies from growing and start-ups from getting off the ground.

However, the Bank Board resisted the pressure to drop the rates and had, in fact, said in November that there would be no further drops in 2000.

Experts have said, however, that the prospects for further cheaper loans for companies are uncertain as the NBS's rate policy for next year will only become clear after February.

"In February we are going to see the secondary effects of deregulations in the prices of gas, electricity etc. on inflation [the government in late December approved a package of price rises for supplies of gas, power, heat, and water as well as transport rises in prices - ed. note] and we'll have to wait and see how that develops. The effects of the rises will dictate the direction of monetary policy. There was room for a cut at the end of 2000 but possibly only one more cut in 2001," said ČSOB's Odor.

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