The Slovak economy showed further signs of slowdown in January, and economists blamed the slump on high real interest rates. The recent easing of the central bank's monetary policy, which began in mid-February, came too late to affect the January figures, they maintain.
"The economy overall has been slowing for some time, and that's not surprising with such high interest rates," said one London-based economist. "We'll have to wait and see whether the change in monetary policy reverses the trend at all."
"High interest rates still applied in January but rates are slowly going down," said Martin Barto of ING Barings.
Interest rates in January ranged between 20 and 30 percent on most maturities, while the annual inflation rate was just over seven percent. At the beginning of March, short-term rates dropped below five percent and long-term rates were just over 20 percent.
The central bank announced last month that it wanted to see a decline in interbank interest rates and has had some success in doing this by keeping the money market in liquidity surplus.
Ján Tóth, an analyst at Tatra Banka, said the central bank's efforts had been designed partly to reduce the burden of government budget deficit financing. But he added that the central bank would need to keep interest rates sufficiently attractive to finance the country's current account deficit through a capital account surplus.
This long-standing problem has been made worse by the country's worsening political situation. "A higher and higher risk premium is needed for a capital account surplus," Tóth said. "To maintain a capital account surplus, you have to attract funds and these funds are needing higher and higher premiums because of political risk."
Tóth said this requirement would limit the extent to which interest rates could fall. He expected gross domestic product growth in 1998 of 4.8 percent compared with 5.9 percent in 1997.
