The Slovak koruna firmed against the euro in the early hours of the session moving to 38.06 however, it lost ground after the decision to left rates unchanged and finished at 38.22. The central bank kept interest rates on hold, with the 2W repo rate at 4.0 % yesterday, in line with market consensus and our own forecast. The decision was unanimous as the board voted 8:0. The subsequent comments sent a hawkish message to the market. Governor Sramko said that inflation risks are still intact and NBS would react if factors behind the 50 bps hike in May persist. Based on FRA 3x6 quotations, expectations for a 75 bps rate hike are priced in. By the next meeting, the NBS will have updated its quarterly inflation prediction, which, in our judgment, will show that inflation will most likely overshoot also the 2007 inflation target. Unless the koruna started to appreciate we pencil in a 50 bps hike in the end of the third or at the beginning of the fourth quarter.
The koruna will further follow the development on the political scene. Today, SMER should announce what parties to invite to its coalition. Two possibilities are in play: HZDS - SMK (neutral or slightly positive) or HZDS - SNS (market unfriendly). The probability of inviting Christian Democrats (KDH) has decreased. EUR/SKK moves up on domestic politics The EUR/CZK pair hovered in a tight range close to the 28.45 level yesterday, virtually ignoring a negative development on the Slovak FX market. It currently seems that the Czech currency has fallen into a wait-and-see mode ahead of Thursday’s CNB Bank Board meeting.
(CSOB - Investment research)