The Slovak koruna broke through 38.0 EUR/SKK boosted by the central bank decision to lift its key repo rate by 50 bps to 4.50% which was in line with our expectations. Less expected, however, was the 100 bps hike in the O/N refinancing rate to 6% and the unchanged O/N sterilization rate at 3%.The widening of the band will increase the volatility of short-term rates and embarrass the behaviour of speculative investors on the domestic market. The central bank pointed out persisting inflationary risks as the main reason behind the decision. As expected, the bank made an upward revision of the official 2007 year-end target to 2.8% from the previous 2.0% on the back of higher regulated energy prices. It is clear the bank need to tighten the monetary policy in order to dampen possible demand inflationary pressures and prevent secondary effects.
Nevertheless the central bank still expects to meet the Maastricht inflation criteria and adopt the euro in 2009. The tone of the press conference was hawkish as the Vice-governor Martin Barto said the monetary policy tightening will have to continue in coming months. We do not change our forecast and expect an additional 50 bps hike in the fourth quarter 2006. Today, the economic calendar is empty and the koruna will probably further chew on yesterday statement. The exchange rate should oscillate within the range of 37.90-38.20. The next important event for the markets will be the economic program of the new government published next week. Slovak koruna firms on NBS rate hike.
(CSOB - Investment research)