(Adds central bank comments, analysts, market reaction)
By Peter Laca
BRATISLAVA, Oct 28 (Reuters) - The Slovak central bank cut
its main interest rate by 50 basis points on Tuesday, aligning
benchmark borrowing costs with the euro zone two months before
the country joins the single currency bloc in January.
The decision, taken at the monthly monetary policy meeting,
brought the key two-week repo rate to 3.75 percent, eliminated
the half-point premium over the euro zone benchmark rate created
after the coordinated cuts by global central banks on Oct. 8.
Analysts said Slovakia may need to ease its monetary policy
further as the market sees more cuts by the European Central
Bank (ECB) to avoid deepening of the financial crisis.
National Bank of Slovakia (NBS) governor Ivan Sramko said
domestic data have so far not shown a significant economic
slowdown, but the bank expects a negative impact on growth in
2009 and this created room for lowering interest rates.
"Aiming to harmonise the interest rates (with ECB), and
stabilise the economy in light of the global crisis, the bank
Board decided to cut the official interest rate by 0.5
percentage points," Sramko told a news conference.
Sramko also said the central bank did not expect major
changes in inflation trends, saying price growth should develop
in line with the bank's medium-term prognosis, which sees
average EU-norm inflation of 3.4 percent next year.
Prior to the changes, the NBS had held rates steady for 17
months, saying it did not need to adjust monetary policy because
inflation trends were mainly driven by factors outside of its
influence, such as oil and food costs.
But Slovakia had to cut the main rate at some point before
it becomes the 16th member of the euro zone next year, and NBS
board members have said earlier the options were a cut all at
once or a gradual reduction.
The Slovak crown, which now has a formal conversion rate to
the euro for the switchover, did not react to the rate cut.
Short-term interbank interest rates moved down, with the
one-month rate easing by some 40 basis points to 3.50 percent,
traders said.
MORE CUTS SEEN
The European Central Bank's interest rate now stands at 3.75
percent following the coordinated rate cuts from October.
The markets have priced in further policy easing as
recession hits western Europe, which means the Slovak central
bank may need to lower its rates again if the ECB makes further
cuts this year.
ECB President Jean-Claude Trichet said on Monday a further
rate cut was possible at the Nov. 6 meeting.
"We expect the ECB to cut rates by another 50bps to 3.25
percent by the end of the year, which implies that Slovakian
rates must fall by another 50bps by January 1st," analysts from
Capital Economics said in a note.
"While timing remains uncertain, we have pencilled in
another 50 bps cut (in Slovakia) in November," they added.
(Reporting by Peter Laca, editing by Stephen Nisbet)
