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Slovak central bank to leave key rate unchanged

Slovakia's central bank will probably keep its benchmark interest rate unchanged for a fifth month as inflation has yet to slow enough for policy makers to reduce borrowing costs, a survey of economists shows.

The Bratislava -based bank will probably leave the two-week repurchase rate at 4.75% tomorrow, according to seven of eight economists surveyed by Bloomberg December 1-19. One predicted a quarter-point cut. The board meeting starts at 9 a.m. and the bank will announce its decision by noon. The eastern European nation needs to cap inflation further to qualify for adopting the euro in 2009, even as falling energy prices and stronger koruna pushed the annual inflation rate to 3% in January from 5.1% in August, economists said.
The 12-month average rate, at 4.3% in December, is above the 2.86% euro-switchover limit for that month. „The bank won't trim rates yet because board members will want to make sure that the inflation criterion for the euro adoption is met,” said Miroslav Frayer, an economist at Komercni Banka AS in Prague.
„Time for lower rates will come in the second quarter.” The koruna was trading at 34.41 against the euro at 3:15 p.m. in Bratislava, down from February 23 close of 34.44. The currency is 8% stronger than a year ago. In its last inflation report released January 30, the central bank lowered its forecast for the end-2007 inflation rate to 1.5% from 2.6% estimated earlier. Such a decline should allow the country to adopt the euro as planned, Governor Ivan Sramko said when presenting the report.

Last year, policymakers raised the benchmark rate four times by a combined 1.75%age 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. Economists said the benchmark rate is poised to fall later this year as the outlook for inflation remains positive.
Furthermore, the gradual increase in exports driven by newly built carmaking factories, such as a plant by PSA Peugeot Citroen, will push the koruna higher, reinforcing the case for lower borrowing costs, said Robert Prega, an economist at Tatrabanka AS in Bratislava. „We expect a lot of good data on the economy in the second quarter,” Prega said. „This will bolster the koruna and allow the central bank to cut rates.” Prega expects the two-week rate to fall half-a-point this year. Komercni's Frayer predicts the rate to fall to 4% by December. (Bloomberg)