The Slovak central bank kept interest rates on hold for a second month on Monday although inflation was higher than expected in July, saying price rises should ease and allow room for more cuts in the long run.
Analysts said the bank's lack of concern about inflation and domestic demand showed a relaxed mood and could signal a rate cut as early as next month.
Its decision at a regular policy meeting left the key two-week repo rate at 4.50 percent, maintaining a 250 basis point premium over the eurozone's cost of money.
Governor Marian Jusko said inflation last month was above the bank's expectations, but the bank did not register demand-led pressures in the economy and price growth should decelerate in the coming months.
"Inflation was higher due to cost factors, and no increase of demand-led pressures had been detected. Due to this fact, no change in monetary policy settings was required," Jusko said.
Jusko warned that world oil prices could drive inflation above the bank's end-year target range of 5.7-7.0 percent, but such external factors were outside the influence of its monetary policy.
The Slovak decision underpinned differing monetary developments in the new European Union members of central Europe. Poland and Czech Republic, the two largest newcomers, raised rates last week to counter inflation risks, while Hungary slashed 50 basis points from its main rate earlier in August.
Slovak central bank officials declined to give a rate outlook for the next few months, but Jusko saw lower borrowing costs in the long run.
"According to our predictions, inflation should decrease gradually and reach levels comparable with the eurozone. Therefore, from this perspective, room for lower interest certainly exists in the long term," he said.
The central bank does not reveal a policy bias to guide market expectations of its monetary moves. But some analysts saw a rate cut sooner rather than later. "Dovish comments are unhelpful for the crown, increasing the chances of a 25 basis point cut in September," said 4Cast analyst Stanislav Gelfer.
The market had widely expected the bank would keep borrowing costs on hold in August because of the absence of firming pressure on the crown and accelerating domestic demand.
"The only reason for reducing interest rates would be a significant decline in core inflation and sharp firming of the crown. None of these is the case at the moment," said Juraj Kotian, an analyst at Erste Bank's unit Slovenska Sporitelna.
4Cast's Gelfer also said future rate decisions will depend on whether the crown resumes its quick appreciating trend.
The central bank's main official goal is price stability, but its rate policy has focused mainly on slowing sharp firming of the crown this year.
Slovakia has the highest headline inflation in the EU, at an annual 8.5 percent in July, but the central bank expects price growth to slow to around four percent next year after the impact of price liberalisation and excise tax hikes fades away.
The monetary body has shaved 150 basis points off its rates in 2004, with the latest 50 basis point cut made in June.
The policy easing was aimed mainly at halting the sharp rise of the crown, which the bank said had been fuelled by inflow of speculative capital attracted by high interest rates.
However, the unit has eased recently, and its present rate of 40.195/230 per euro is far from a record high of 39.675.
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