The Slovak koruna slightly corrected its previous losses and finished Friday’s trading stronger at 37.72 EUR/SKK. As expected, the NBS decision to leave the rates unchanged; with the 2W repo at 4.5% didn’t have any impact on the exchange rate. The subsequent comments confirmed a hawkish rhetoric at the NBS. To some extent, the NBS reaffirmed the tone of its July statement that there are persisting inflation risks both from the demand and supply side which means that reasons to tighten monetary policy remain.
By the next meeting, the NBS will have detailed data of the Q2 GDP growth (6.6% y/y preliminary). Moreover, as we noted on Friday, the Governor criticized the first draft of 2007 state budget and he sees inflation risks from fiscal impact. He also stressed that the central bank would have to continue to tighten the monetary policy in such environment. Looking ahead, we see scope for 50 bps tightening in September or October when the NBS will have updated its quarterly inflation prediction. The trading on the forex market will be subdued this week as both Tuesday and Friday are national holiday in Slovakia.This could result in lower market liquidity. We expect the koruna to continue trading within the narrow range around the level of 37.65 EUR/SKK. Slovak koruna does not react on NBS decision
(CSOB - Investment research)