Spectator on facebook

Spectator on facebook

NBS WARNS THAT MONETARY TIGHTENING MAY CONTINUE IF FISCAL POLICY REMAINS LOOSE

Central bank raises key rates to meet imbalances

THE CENTRAL bank raised its key interest rates by 50 basis points on April 26, bringing the main two-week repo rate to 8.25 per cent and citing deepening external and internal imbalances as the reason for the move.
The rate increase took the markets by surprise, but central bank governor Marián Jusko said the bank had been responding to the government's failure the day before to take decisive action to curb a widening fiscal deficit.
The central bank has repeatedly urged the cabinet to adopt measures to tackle the fiscal deficit, which the Finance Ministry has calculated might rise to 5.5 per cent of GDP from the 3.5 per cent budget target if major spending cuts are not made.


NBS Governor Jusko is worried.
photo: TASR

THE CENTRAL bank raised its key interest rates by 50 basis points on April 26, bringing the main two-week repo rate to 8.25 per cent and citing deepening external and internal imbalances as the reason for the move.

The rate increase took the markets by surprise, but central bank governor Marián Jusko said the bank had been responding to the government's failure the day before to take decisive action to curb a widening fiscal deficit.

The central bank has repeatedly urged the cabinet to adopt measures to tackle the fiscal deficit, which the Finance Ministry has calculated might rise to 5.5 per cent of GDP from the 3.5 per cent budget target if major spending cuts are not made.

"The government did not take such decisions [on April 25], despite the fact that they were discussed by the council of economic ministers," Jusko said. "This rate hike itself will not reverse the existing development. On the other hand, it is a signal indicating the future direction of monetary policy if the economic risks remain."

Eva Limanska, a fixed income analyst for Merrill Lynch in London, said she understood the central bank's anxieties, and its desire "to perform through monetary policy the job [reducing domestic demand] the government is avoiding in fiscal policy", but added that "the government is in a very difficult position in an election year."

The bank's move was also motivated by Slovakia's high trade deficit, which last year rose to over 10 per cent of GDP and shows few signs so far this year of narrowing.

While the March foreign trade gap showed its first decline on an annual basis in more than a year, in figures released April 29, the central bank said it saw risks of a full-year gap near last year's record levels.

Although analysts said the better-than-expected March trade figure could mean an improvement in the widening current account deficit, the central bank warned it might tighten its policy further if imbalances persisted.

The March trade deficit was Sk7.4 billion against an Sk8.6 billion shortfall in March 2001, the Slovak Statistics Office said.

The deficit fell for the first time since the beginning of 2001, when the trade balance began to deteriorate sharply because of large technology imports and eventually became the main driver in the widening current account deficit.

"It was better than expected. We were worried that it would be a much larger number after the central bank [rate hike]," said Slovenská Sporiteľňa analyst Juraj Kotian.

Parallel data released by the central bank showed the preliminary cumulative current account shortfall for January and February totalled Sk8.1 billion, up from Sk6.0 billion in the same period a year ago.

Jusko said the March trade gap could signal some stabilisation in the external balance, but added the bank was focusing more on data for the entire first quarter, which indicated the full-year deficit would be near the 2001 record of Sk103 billion.

"For us, it is more important to look at cumulative data for the first quarter than data from a single month. So far, the results from the first quarter indicate a possible deficit of more than Sk100 billion this year."

Jusko also said higher rates could attract short-term capital and boost the crown, but added that such firming would not be justified by Slovakia's economic performance "at all".

He said the bank would now monitor the crown's development more closely, but added it was not considering market interventions to weaken the unit at present.

Top stories

Unknown places worth visiting in Slovakia Photo

The year 2016 brought record numbers for tourism in Slovakia.

Špania Dolina, the runner-up in the Village of the Year competition.

This is not a game, and these are not children

If politicians care about the future of the country, they need to offer young protesters with specific demands more than the just same old vague assurances.

Nu Dance festival changes date and the finale coincides with International Dance Day

The festival of contemporary dance has not just moved in time but also from the stage to the streets, encouraging public participation.

Renan Martins: Let Me Die in My Footsteps

(W)Rapping up two worlds in one music

The Fjúžn festival annually presents interesting musical projects from people who cross borders, literally or symbolically. This year, the headliner of the main festival concert on April 22 will be the French-Iraqi…

The Iraqi-French band Aiwa