Interest Rates

At the last Governing Council meeting, the ECB retained the key rate unchanged at 1%. At the next Meeting on February 9, we (aswell as the market) again anticipate stable rates. Our expectation is in line with the quite favorable data that the Euro zone yielded within the past couple of weeks. The LTRO issued by the ECB early January also speaks for the stability of key rate, as it succeeded in injecting the much needed liquidity to the European financial markets.

As the debt crisis continues to pose a significant risk to the growth in the Euro area, in 2012 we expect two additional ECB rate cuts to stimulate the economy: the first (-25 bps) in March, and the latter by the end of Q2 (-25 bps). The key rate should remain at 0.5% until 2014.

Real Economy

The Statistical Office will publish its preliminary Q4 GDP data on January 15. In the last quarter, we expect the annual growth at around 2.5%. The slowdown (compared to the Q3 growth at 3%) results from a lower foreign demand for Slovak industrial products in the context of the European debt crisis, which has now become palpable in the real economies.

Unlike in the previous months, in December we expect foreign trade to stagnate. This is due to the seasonal factors: the surge of imports in the pre-Christmas season. As for industrial production, in December we anticipate an insignificant annual rise in production at around 1.5 %, just like the month prior.

Price Development

In January, we expect CPI at 0.9% q/q, owing to higher heating and global food prices, as well as the seasonal habit of firms to overprice products at the outset of the year. This implies an annual inflation rate at 3.4 %, down from 4.7% in December. The slowdown in the annual rate of inflation is due to the fading effect of VAT hike last year, as well as slower relative energy price growth.