Interest rate cut fails to halt firming crown

THE DECISION by Slovakia's central bank (NBS) to lower interest rates in response to the strengthening Slovak crown has not had much effect on the exchange rate, say analysts.
Slovakia's currency reached Sk41.09 against its euro benchmark on November 11, a significant psychological level, say analysts, and the highest value for the currency since the introduction of a floating currency peg in October 1998.
After several interventions on foreign currency markets pulled the crown's value back slightly, NBS officials said continued growth had forced the bank to lower interest rates by 1.5 percentage points, effective November 18.

THE DECISION by Slovakia's central bank (NBS) to lower interest rates in response to the strengthening Slovak crown has not had much effect on the exchange rate, say analysts.

Slovakia's currency reached Sk41.09 against its euro benchmark on November 11, a significant psychological level, say analysts, and the highest value for the currency since the introduction of a floating currency peg in October 1998.

After several interventions on foreign currency markets pulled the crown's value back slightly, NBS officials said continued growth had forced the bank to lower interest rates by 1.5 percentage points, effective November 18.

"Such a large decrease in rates was surprising because we expected a fall of 0.5 points only," said Ján Tóth, senior analyst from ING Bank.

However, following news of the rate cut on November 15, the crown weakened by only Sk0.05 against its euro benchmark, falling to Sk41.8 before firming back up to Sk41.67.

"The NBS was not successful in reversing the trend and weakening the crown," said Slovenská Sporiteľňa dealer Juraj Zabadal.

In the following days, the Slovak currency continued strengthening, repeatedly crossing Sk41.4 level in response to what dealers called positive expectations ahead of the Prague Nato summit, at which Slovakia was expected to receive an invitation to join the alliance.

"The trend of the crown's strengthening is dominating the market," said Istrobanka dealer Alexander Drnaj.

"However, this could be stopped by [further] NBS intervention," he added.

NBS officials say they will continue a defensive policy towards the crown exchange rate, and reiterate statements that the currency's recent growth does not reflect Slovakia's real economic situation.

In addition, say national bankers, a strong crown may have negative impacts on Slovakia's foreign trade figures.

"NBS is ready to use all its available tools to make the Slovak crown exchange rate proportionate to economic fundamentals," said NBS governor Marián Jusko.

However, analysts say the defensive policy of the NBS may be overly cautious.

"There is no evidence that the current exchange rate is significantly hindering Slovak exporters," said Tóth from ING Bank.

Analysts also agree that the NBS would have to implement a much more significant interest rate cut in order to stop the crown's strengthening, which they say is an unrealistic step.

"After the recent statements of Finance Minister Ivan Mikloš [that the exchange rate will be either stable or slightly up in the year 2003], it looks like NBS is the only player who considers current exchange rates as alarming," said Tóth.

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