The Slovak central bank (NBS) on April 24 said its strict monetary policy measures, imposed gradually since last summer, were now bringing the desired positive results in money supply and credit expansion.
"I can say now that the policy measures are working in the way they were designed, they are reducing M2 growth and credit expansion," NBS Governor Vladimír Masár told journalists.
The NBS implemented a series of measures last summer to rein in rapidly growing credit expansion which was at the heart of the fast growth in the country's money supply.
But some analysts said the bank should be careful about relaxing its policy - at least for the short-term. "The restrictive [monetary] policy finally showed the desired effect on the trade [balance] in the first two months of the year and we expect that favorable development to continue in the first quarter [of 1997]," said Juraj Renčko, an economic analyst at the Slovak Academy of Science. "But it is too early to loosen monetary policy since the NBS must be aware of the risk that more money in the economy could simply be used for consumption purposes and that would return the trade balance to its previous problems."
"To keep the trade balance at the planned level and achieve a deficit of five percent of GDP will really be a tough job," said Martin Barto, an analyst at ING Barings in Bratislava.
Another analyst said recent problems inside the ruling coalition, a forthcoming NATO membership referendum and 1998 general elections would make any budget cuts even more sensitive than usual.
"The Czechs had to do it recently, which is one year after the elections, but the Slovaks would have to cut budget spending one year before the polls which is much more difficult," said Charlie Robertson, an analyst from the London-based HILFE think-tank.
The tightening
Among the measures the central bank employed to gain a tighter grip on the expanding money supply were increasing minimum reserves requirements for commercial banks and imposing special foreign exchange position measure to limit the depositing of foreign funds in Slovak banks.
The NBS moved further in its restrictions at the beginning of this year, reacting to the expansive state budget spending plans, when it stopped fixing the repo rate, which commercial banks often used as a last resort to refinance their activities.
The M2 money supply aggregate - the key NBS yardstick to assess monetary development - gradually declined to 13.9 percent, year-on-year, growth in February from 19.5 percent last August.
In February 1996, M2 expansion was 21 percent year-on-year. The overall amount of credits was 374.80 billion Sk at the end of last year, slightly up from 354.10 billion Sk last summer when the NBS imposed its measures.
Credit narrowing
Masár said the NBS measures also helped curb credit expansion which, he said, now showed a positive trend. The tight monetary policy created an acute liquidity shortage on the interbank market, pushing interest rates to record levels of above 26 percent several times this year.
Rates on the interbank market oscillated from an average 15.79 percent for overnight funds to 18.28 percent for three-month money. Masár said he was "not happy" with the current high interbank rates, but he added that the central bank was not considering any change in rates at the moment.
Masár added that an easing of monetary policy, including any interest rate cut, was not currently in the cards. "At present we are not considering easing monetary policy, including any rate cut," Masár said.
