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Slovakia: Monthly forecast

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Price development

Fri, Apr 6 2007, 07:31 GMT
by Mária Valachyová

Erste Bank der oesterreichischen Sparkassen AG

Price development

Overall consumer price index was likely to have increased in March by the same 0.2% as in the previous month (the main culprits being fuels and services), bringing annual inflation up a notch to 2.8%, from 2.7% in February. EU-norm prices (HICP index) are likely to have increased to 2.1% in our view. The positive inflation outlook should remain unchanged (we see HICP inflation at 1.6% by the year-end).

Real economy

Real data will provide a picture of diverging dynamics of production and consumption. While industrial production should have put in yet another strong performance, resulting in a favorable trade balance (likely with a surplus for the second month running), domestic consumption should show signs of cooling; we expect a low reading for retail sales growth for the second month in a row, although stronger than in January. The data would be in line with the expected switch in the driving forces of the GDP growth (with external demand taking over the lead).

Implications for koruna and monetary policy

Real data as well as inflation numbers will stay aside of the market’s interest (the story of strong economic growth and the euro adoption in 2009 is broadly expected). Unless the regional sentiment worsens, we can expect further strengthening of the koruna in a near term (motivated by speculative rather than real flows). The central bank’s action against firming koruna might continue, although interventions at weaker levels than the CB intervened before were a bit surprising.

Massive interventions (estimated at EUR 2.6bn in March and April combined) make the currency more vulnerable in the case of a sudden sentiment change. Hence, it could happen that the CB would appear later on, intervening on the weaker side of the parity (35.44 EUR/SKK +2.25%, i.e. 36.24 EUR/SKK). After March interest rate cut (when the CB lowered the key 2W repo rate by 25bp, overnight sterilization rate by 75bp to 2.5% and overnight refinancing rate by 25bp to 6.0%), the CB renewed acceptance in a 2W repo tender. Last Tuesday, maximum accepted yield stood at 4.0%, below the official 2W repo rate of 4.5%. We think that the central bank might want to normalize the situation on the money market and lower official interest rates by 25bp as soon as in April (especially if O/N sterilization rate stays on hold). The rate cut would also be in line with the strong koruna, which has repeatedly been objected to by central bank officials.

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Published on  Fri, Apr 6 2007, 07:35 GMT