On Tuesday, the Slovak koruna
was stable, close to the level of EUR/SKK
36.30 as investors were waiting for the NBS
decision regarding rates.
The NBS surprised the market as it left
interest rates unchanged while the majority
of the market together with us had expected
a 25 bps hike. The main reason behind the
decision was sharp koruna appreciation
(roughly 3% over the past month) and lower
energy prices. On the other hand, the bank
still sees demand inflation risks stemming
from wage growth. Moreover, the economy
will remain with a positive output gap for a
longer time. The 2006 HICP forecast was
slightly increased to 4.1% (versus 3.9% in
July projection).
But the more important 2007 inflation
forecast (from the point of Maastricht
criteria) was slightly lowered to 2.6% vs.
previously expected 2.8%. As the full
medium-term prognosis is not yet available,
we don’t know any further details. But it’s
possible that the new forecasts do not
include gas price cuts by 3.1% in January
2007 as this news was released on
Tuesday.
What about the next steps from the NBS?
The rate decision and related comments do
not alter our interest-rate view: we feel that
the rates are close to their peak. The
abovementioned demand inflation risks will
probably keep the bank on a tightening bias.
We don’t exclude a 25 bps hike by year-end.
This will mainly depend on the further
koruna development. Note that the
exchange rate accounts for two thirds of the
real monetary conditions index of the NBS.
If the currency will continue to appreciate, it
is possible that we don’t see any further
hikes.
Regarding trading today, the market will
chew on the NBS statement and wait for the
ECB decision and its comments this
afternoon. Nevertheless, we do not expect a
significant deviation from the current market
levels and look for sideways trading.
(CSOB - Investment research)