Similar to most of the CE currencies, the Slovak koruna was also hit by a selling wave yesterday, with EUR/SKK rising to 37.80. Today, the central bank announces its monthly interest-rate decision. We expect the repo rate to be left unchanged at 4.5% in line with the market consensus, hence the outcome should leave the markets barely affected. Traders will focus on the press conference afterwards and accompanying statement. The last signaled that further rate hikes were likely and we assume the hawkish tone will be preserved.
This could help the unit to some extent, although any major adjustment in the exchange rate is unlikely. The market has already priced in a 50 bps hike in three months. We expect the rates will be increased probably in October when the new inflation prognosis will be released and the NBS will have new data from the economy. The NBS Governor Sramko said for local newspaper that the first draft of the 2007 state budget is not restrictive enough and that the central bank would have to continue to tighten the monetary policy in order to control the inflation and fulfill all criteria needed.
(CSOB - Investment research)