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SLOVAKIA'S INTEREST RATES NOW HARMONISED WITH EUROZONE

Central bank cuts rates

IN A WIDELY-ANTICIPATED move, Slovakia’s central bank cut its key interest rates from October 29, bringing them into line with those of the eurozone. The National Bank of Slovakia (NBS) cut its key rates by 50 basis points (half a percentage point) at the regular meeting of its bank board, leaving the two-week sterilization repo rate at 3.75 percent, the overnight refinancing rate at 4.75 percent and the overnight sterilization rate at 2.75 percent, the NBS reported.

IN A WIDELY-ANTICIPATED move, Slovakia’s central bank cut its key interest rates from October 29, bringing them into line with those of the eurozone. The National Bank of Slovakia (NBS) cut its key rates by 50 basis points (half a percentage point) at the regular meeting of its bank board, leaving the two-week sterilization repo rate at 3.75 percent, the overnight refinancing rate at 4.75 percent and the overnight sterilization rate at 2.75 percent, the NBS reported.

The move was intended to harmonise interest rates with those of the European Central Bank (ECB) and stabilise the economy with regard to the global financial crisis, said the NBS in an official release.

However, the board of the central bank was also swift to add that the Slovak “banking sector is healthy and has sufficient liquidity while the inter-bank money market functions without problems.”

“In September, inflation grew moderately year-on-year,” NBS spokeswoman Jana Kováčová wrote in an official release about the bank’s move. “Due to the development of prices of raw materials as well as the base effect of last year’s growth in food prices in the last quarter of 2007, inflation may slow down in the coming months. Though monthly data do not yet show unambiguous signals of a more significant slowdown of economic growth, considering the posted slowdown of foreign demand, both actual and expected, a negative impact on Slovakia’s economy is expected.”

To ease some of the global financial woes, on October 8 the European Central Bank reduced the key interest rates in the eurozone to 3.75 percent for main refinancing operations, 2.75 percent for the deposit facility, and 4.75 percent for the marginal lending facility.

Since Slovak banks are not experiencing liquidity problems, market watchers suggested that the central bank’s main reason for cutting its rates was to harmonise with eurozone levels.

“After the European Central Bank cut its interest rates by 50 basis points, such a step on the part of the National Bank of Slovakia was expected,” Silvia Čechovičová, senior analyst with ČSOB bank, told The Slovak Spectator.

This is in recognition of the fact that on January 1, 2009, Slovakia will enter the eurozone and will then be subject to ECB rates, she added.

Martin Lenko, senior analyst with VÚB bank, said that though the NBS did not see any need to react immediately to the coordinated cut in official interest rates worldwide on October 8, the market expected that the central bank would, at its regular session on October 28, make such a move.

“Apart from the need to harmonise its official interest rates with the ECB by the end of this year, another argument for lowering the two-week sterilization repo rate of the NBS, from 4.25 percent to the refinancing rate of the ECB at 3.75 percent, is the risk of hindering economic growth in Slovakia and the slowdown of cost-driven inflation in 2009,” Lenko told The Slovak Spectator. “Both these risks will obviously influence the new estimates of the NBS, which will be introduced in early December.”

Market watchers do not expect the cut to bring any dramatic changes to regular bank clients.

Even with a 50-basis-point cut in the central bank’s official rates, this has been reflected in a significant way only in Slovak interbank market rates (Bribor) for short maturity rates under three months, said Lenko. Rates with a maturity over six months have also dropped, but only slightly, given that the market is already factoring in the higher Euro interbank rate (Euribor), he added.

“Thus, the cut in official rates should bring practically no change for regular bank clients,” Lenko said. “For clients who are using banks for very short-term deposits, for example two weeks, it means lower revenues. However, this should, with the approaching year-end, gradually grow, since the higher Euribor will be factored into the short maturity Bribor.”

However, analysts anticipate further eurozone rates changes, following statements by ECB President Jean-Claude Trichet.

“Obviously this was not the last easing of monetary policies that we have witnessed,” Čechovičová said. “ECB President Trichet this week clearly suggested that the rates would be cut again at the November session of the ECB. The NBS would then follow this step.”

According to Čechovičová, as far as the conditions in the market are normal, any cut in interest rates should also be reflected in bank products.

“However, the liquidity crisis is still present, which will also be reflected in the pressure on the growth of credit margins for loan products,” Čechovičová added.

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