Slovakia Cuts Key Rate to ECB Level Before Euro Entry

By Andrea Dudikova and Yon Pulkrabek

Nov. 11 (Bloomberg) -- The Slovak central bank unexpectedly cut its benchmark interest rate to 3.25 percent, bringing it to the level of the European Central Bank as the eastern European nation prepares to adopt the euro at the beginning of next year.

The Bratislava, Slovakia-based Narodna Banka Slovenska board today unanimously voted to cut the rate half a percentage point, matching a Nov. 6 ECB decision. The reduction was needed because Slovakia needs to merge its monetary policy with the ECB when it becomes a euro-zone member, though the timing was unscheduled.

Slovakia will be the second former communist country to adopt the common currency when it joins the euro zone on Jan. 1, completing its transition to western economies. The Slovak bank cut the key rate for a second time in a row as the ECB has dropped borrowing costs to ward off recession in western Europe following a collapse in markets.

``It's all about closing the interest rate differential with the eurozone ahead of adopting the euro,'' said Neil Shearing, an emerging-market economist at Capital Economics Ltd. There are ``further cuts to come'' if the Frankfurt-based ECB continues to reduce its key rate.

The central bank said it decided to follow the ECB in cutting interest rates ahead of its regular Nov. 25 rate-setting meeting as it needs to complete preparations before of the euro switch, it said in an e-mailed statement.

``Such a decision will simplify some processes related to the euro adoption, allow a smoother switch to the common currency in the area of interest rates and at the same time will contribute to stabilization of conditions on the money market,'' the bank said.

The current development of commodity prices and expectations of local and global demand allowed it to reduce interest rates ``without a negative impact on inflation developments,'' the bank said.

The harmonized inflation rate, the rate used to judge its qualifications for euro entry, was at 4.5 percent in September.

The koruna traded at 30.484 per euro at 1:47 p.m. in Bratislava, compared with 30.463 late yesterday and a switchover rate of 30.126 set in July.