NBS To Follow ECB Moves

The National Bank of Slovakia (NBS) kept its benchmark 2-week repo rate at 4.25% for the 15th consecutive month on July 29. This was despite an acceleration in inflation (as measured by HICP) to a 22-month high of 4.3% y-o-y in June. To be sure, domestic inflation rates are unlikely to impact monetary policy decision-making in Slovakia going forward, with the adoption of the euro and the harmonisation of borrowing costs with the eurozone expected to remain the priority. As such, we expect monetary tightening by the NBS through the rest of 2008 to be restricted to just 25bps, bringing the policy rate to 4.50%. This correlates with our view for the European Central Bank 's refinancing rate, which is also forecast to be raised to 4.50% by end-year. Beyond 2008, we expect the ECB to maintain interest rates at 4.50% in 2009 before easing to 4.00% in 2010.

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