WHEN Slovakia’s central bank cut key interest rates two weeks ago observers said that there was nothing surprising about its move to harmonise its rates with those in the eurozone. But when the National Bank of Slovakia (NBS) said on November 11 that it would cut its rates by 50 basis points to follow the European Central Bank’s (ECB’s) latest decision, it took market watchers by surprise.
They dubbed the move ‘somewhat unexpected’, since the NBS acted weeks before its bank board’s regular month-end session at which such decisions are normally made.
Observers say that the NBS will now loyally follow any similar moves by the ECB because of the country’s planned entry to the eurozone on January 1, 2009.
In Slovakia, the two-week sterilization repo rate fell by 50 basis points to the level of the ECB’s key interest rate, 3.25 percent. The overnight sterilization repo rate dropped from 2.75 percent to 2.25 percent and the one-day refinancing rate from 4.75 percent to 4.25 percent, according to the NBS.
Continuing its interest-rate-cut cure to ease the impacts of the global financial crisis, on November 6, the European Central Bank cut the minimum bid rate on the main refinancing operations of the eurozone by 50 basis points to 3.25 percent. The interest rate on its marginal lending facility was cut by 50 basis points, to 3.75 percent, and the interest rate on the deposit facility by 50 basis points, to 2.75 percent, with effect from November 12.
Even though the cuts were anticipated, senior analyst with the VÚB bank Martin Lenko and Poštová Banka analyst Zuzana Holeščáková told The Slovak Spectator that the market had expected the NBS to cut its rates only at its regular board session on November 25.
“The NBS Bank Board decided to follow last week’s cut in interest rates by the ECB in a shorter time than after the previous rate change, in order to further harmonise the Slovak financial environment with the euro area,” Jana Kováčová, spokesperson of the NBS wrote in an official statement, adding: “This decision will simplify some euro-switch processes, allow a smoother changeover to the single currency in the area of interest rates and contribute to stabilization of conditions on the money market.”
According to Kováčová, it was mainly the development in commodity prices and expectations affecting both domestic and global demand which allowed the central bank to cut key interest rates without a negative effect on inflation. In the light of the move, the NBS expects further stabilisation of interest rates in the primary and secondary markets, she added.
“By this step the NBS within its harmonisation activities is loyally following the decisions of the European Central Bank, which cut key interest rates on November 6,” Holeščáková said.
Lenko expects the central bank to continue following in the steps of the ECB, as far as rate cuts are concerned, up to the end of this year.
“The estimate of our colleagues from Intesa Sanpaolo [the parent bank of VÚB] for the two week refinancing rate for the end of December is 2.75 percent,” Lenko told The Slovak Spectator.
However, Lenko also said that what the NBS move has done, among other things, is to indicate that rate cuts do not necessarily have to happen at the regular session of the NBS bank board. As for the reasons for the move, Lenko said it hard to tell what exactly led the NBS to cut rates and one can only speculate about it.
“However, I lean towards the interpretation that the NBS wanted to harmonise Slovak rates with European levels as soon as possible,” Lenko told The Slovak Spectator. “Other possible reasons are rather speculative.”
Holeščáková thinks that the central bank may also have adjusted key interest promptly because the ECB could still be forced to ease monetary policy further.
“However, we think that the central bank need not have hurried with this decision at all,” Holeščáková said. “Slovak banks do not currently have problems with liquidity and are depositing their available finances with the central bank.”
According to Holeščáková, the central bank’s decision to cut rates repeatedly reduced the revenues of the banks from the regular two-week repo tenders but also from one-day sterilizations.
Despite this, market watchers do not expect there to be any significant impact from the rate changes on loan products by the end of the year.
Given that banks are adjusting risk and liquidity margins, something which contributes to the final interest rate for loans, and the spreading effects of the financial crisis, the cut in official interest rates will probably not have a significant impact on interest rates for loan products before the end of this year, said Lenko.
The change in rates is not currently affecting the Slovak crown’s exchange rate against the euro, said Holeščáková. The crown has been lingering at Sk30.450 to the €1, which is above the set conversion rate at which all crowns will be converted to euros on January 1, she said.
Holeščáková also explained that the central banks, by cutting interest rates, have put downward pressure on the price of money so that commercial banks which need to can borrow cash at a cheaper price from the central bank and that this should eventually have the effect of cutting inter-bank rates on the market, which are still at much higher levels than the key interest rate.
With the situation on financial markets gradually calming, the cut in key interest rates should be reflected in interbank rates, which could drop over the next year, Holeščáková said.
“It is precisely these rates which influence the rates of the loan and deposit products which banks offer to their clients,” she added.
