The Slovak central bank (NBS) left interest rates unchanged at a policy meeting on Tuesday and signalled a pause in the current monetary policy easing as recent inflation and trade data were worse than expected.
A majority of analysts in a Reuters poll had forecast no change in rates, as the NBS wants local rates to approach eurozone levels, which are expected to rise next month, as part of the plan to adopt the euro in 2009.
NBS Governor Ivan Sramko told a news conference after the meeting the board was unanimous in holding rates - no other proposal was voted on - because recent data differed slightly from forecasts and more time is needed to analyse the figures.
"Because macroeconomic trends in individual quarters can show some volatility, the bank board needs to further monitor and analyse trends in individual indicators in the coming months in order to indentify possible inflation risks," he said.
"We consider the current settings as appropriate, the optimal scenario would be to gradually approach eurozone rate levels," he said. The bank does not give a monetary policy bias or outlook for rates.
The NBS cut the repo rate by 25 basis points in both March and April - it currently stands at 4.25 percent - after a firming crown tightened monetary conditions and helped to improve the inflation outlook. But the crown has eased by 1.1 percent against the euro since the April interest rate meeting, adding to reasons for keeping monetary policy unchanged in May. The crown held steady after the rate decision was announced, trading at 34.070 against the euro.
"A rate cut in the second quarter now looks less likely, especially given that the crown may do the job of loosening monetary conditions," said Simon Quijano-Evans of CA IB International Markets.
Slovak monetary policy is focused on making sure the country meets the inflation condition for euro adoption, which should be assessed in the second quarter of 2008. The central bank has repeatedly said it expect to fulfil the price growth condition for euro adoption with a buffer, forecasting the inflation rate will fall to 1.3 percent at the end of 2007 from April's 2.0 percent.
Sramko said the latest data show inflation was slightly higher than forecast, influenced mainly by volatile food prices while the trade deficit was relatively high in March as export growth slowed. Analysts said the bank would not risk jeopardising the euro zone entry target with too loose monetary policy.