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Slovak central bank holds rates

The Slovak central bank kept interest rates unchanged for the 10th month in a row, in line with market expectations.

The decision reached as rapid economic growth was not creating inflationary pressures, left the main two-week interest rate at 4.25%, preserving a quarter percentage point premium over the main euro zone interest rate just 10 months before Slovakia plans to adopt the single European currency.

NBS Vice Governor Viliam Ostrozlik said the economy was broadly developing in line with expectations and a monetary policy change was not warranted.

Slovakia's economy grew by a record 10.3% in 2007, according to preliminary data, boosted partly by people stocking up on cigarettes ahead of a tax hike, but the NBS said the export-driven nature of the expansion meant it was not creating demand-led inflationary pressures.

“Macroeconomic deviations from NBS' estimates are caused by cost or one-off factors,” Ostrozlik told a news conference.

Inflation is Slovakia's key challenge in seeking to become the 16th member of the euro zone. Using the EU measure, Slovak inflation hit a one-year peak of 2.5% in December.

However, the price growth spike was driven mainly by higher food and fuel costs which are pushing up inflation rates around the world, and Slovak inflation has been under the variable threshold for euro adoption since August last year.

Bratislava expects to meet the nominal conditions for entering the euro zone when its application is assessed in the spring. But it will also have to prove it has inflation under long-term control.

The Slovak crown hit a record high of 32.680 to the euro on Monday, and a rising currency tightens monetary conditions for the economy.

The crown was boosted by comments by Central Bank Vice Governor Martin Barto, who said last week the switchover rate to the euro should reflect future and not only past developments in economic fundamentals.

Analysts say rising productivity would justify a stronger conversion rate to the euro, which will be decided by the Slovak government and EU authorities by the end of July.

A firmer switchover level, economists say, would help to counter inflation risks after the country loses the economic flexibility of independent monetary policy and its own currency.

Vice Governor Ostrozlik said the board agreed it would not comment on the conversion rate until it is set.

Slovakia will have to bring its rates to parity with the euro zone as part of the euro adoption process, and an eventual rate reduction by the European Central Bank (ECB) would mean even sharper monetary policy easing in the small ex-communist EU member if it is judged ready to join the euro bloc.

“The NBS would need to align its policy rates with the ECB in the second half of 2008, delivering an additional monetary stimulus to the economy, which could be compensated for by a stronger (currency) conversion rate,” said ING Bank analyst Eduard Hagara. (Reuters)