The Governor of the Slovak National Bank (NBS) Vladimír Masár said on May 13 there was no room for a fall in interest rates and that monetary policy would be more conservative. He also said that any moves to influence the rate of the currency would more likely come in the crown market than in foreign exchange operations. The Slovak crown, which was floated in October last year, has been touching all-time low levels against the euro in recent days. In early afternoon trading it was quoted at 45.45/55 to the euro. "What room there is for monetary policy, we see in the area of crown activities rather than in direct foreign currency interventions," Masár said.
"We think there is no room for the NBS to support the supply side (of the money market) to the extent that it could at the beginning of the year. Automatically, the interest rate decline will at least stop...We have to realise that interest rates have a certain protective function in terms of the crown exchange rate," he added.
While he did not specify where the central bank would like to see the crown stabilise, he said the central bank's 5.0-7.0% net inflation target was crucial. The central bank said earlier that its decision not to add liquidity to the money market on May 13 was partly because of recent developments in the exchange rate.
However, shortly after announcing there would be no repo, what the central bank called an "extreme" reaction on the markets sent overnight rates soaring to around 17% from 10%. The bank then set an overnight repo to calm the market.
Masár reaffirmed his view that the public finances were not developing as the bank had assumed at the beginning of the year. This meant that it would compensate by taking a more restrictive stance.
"I have to state that the positive reversal in the development of the public finances that we had anticipated has not taken place. For that reason, our monetary policy has to be more conservative and more neutral, less forthcoming than it was at the beginning of the year."
The government passed a 1999 budget which assumes a fiscal deficit of around two percent of gross domestic product compared with 5.5% in 1998. But Deputy Prime Minister for the Economy Ivan Mikloš said that as things stand now, the deficit would be at three percent of GDP by the end of the year.
"We have to try through our operations to partially correct these developments through monetary policy... Our more conservative approach can already clearly be felt in our attitude to direct credit to the government through technical loans. We think the Finance Ministry should primarily use market sources to fill its financing needs, even if these activities in the market can affect interest rate increases," Mikloš said.
Earlier this week the central bank said it would no longer automatically allow the Finance Ministry to issue treasury bills into the banks portfolio in order to raise funds. He said the possibility of using this method remained open but only in exceptional circumstances.