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Slovak central bank keeps rates steady for 4th month

Slovakia's central bank kept its benchmark interest rate unchanged for a fourth month as the strengthening koruna and falling energy prices help curbinflation.

Policy makers left the two-week repurchase rate at 4.75% today, spokesman Igor Barat said in a conference call with journalists. He didn't elaborate on the decision, which was expected by all 10 economists surveyed January 3-26. The koruna's advance against the euro and falling utility prices are raising chances inflation will slow enough to allow the eastern European nation to adopt the euro in 2009, earlier than most of its peers. Governor Ivan Sramko said on January 15 that the period of rate increases has ended. „Given the current koruna rate and the improved inflation outlook, the decision was well expected,” said Robert Prega, an economist at Tatra Banka AS in Bratislava. „This creates conditions for a rate cut, which may come earlier than at the end of this year.” The koruna was trading at 35.30 against the euro at 12:17 p.m. in Bratislava, up from 3.27 to the euro yesterday. Even as the currency has fallen from the December 28 record of 34.06 against the euro, it remains about 6% stronger than a year ago.

The central bank has raised the benchmark rate four times last year by a combined 1.75 percentage points to keep the country on course to adopting the euro in 2009 by fending off inflationary pressures stemming from rising oil prices and accelerating wage and economic growth. Bank board member Ludovit Odor on January 22 said the improved inflation outlook will allow policymakers to consider a rate cut as early as this year. Slovakia, which joined the European Union in 2004, aims to switch to the euro before Poland, the Czech Republic and Hungary. To adopt the euro, candidate nations must keep inflation to within 1.5 percentage points of the 12-month average of the three EU states with the lowest inflation rates. That gave a December target of 2.8%. The central bank will today also release its new quarterly inflation outlook. In its last report released on October 31, the central bank estimated 12-month average inflation at 2.5% in the Q2 of 2008, when the country will file its bid to adopt Europe's common currency.

Inflationary concerns have since eased as the country's utility regulator ruled that electricity and heat prices will remain steady in 2007 while gas prices will fall. Maria Valachyova, an economist at Slovenska Sporitelna AS, said the central bank may revise its end-2007 inflation forecast to 2%, matching its original target. Odor said in the January 22 interview that inflation will fall „close” to the target this year. Neither accelerating economic growth represents a risk for inflation, since the expansion will be driven mainly by exporters, she said. The Finance Ministry revised its forecast for the 2007 growth to a record 8.1% from originally estimated 7.4%. The economy probably advanced 7.9% last year, the ministry said. (Bloomberg)