Decisions adopted by the Governing Board on the occasion of its 327th regular meeting on 9 February 2006

At the meeting on Thursday February 9, the Governing Board of the Bank of Slovenia reduced main interest rates by 25 basic points, effective on 10 February 2006. Interest rate of 60-days tolar bills is reduced to 3.75%, buy/sell FX swap to 1.25%, sell/buy FX swap to 0.75%, and lombard loan to 4.75% p.a. The change reflects structural adjustment of interest rates, along the lines of nominal convergence prior to the adoption of the euro.

Annual inflation in Slovenia reached 2.4% in January. Monthly increase of prices in January was minus 0.5%. The January price developments were affected by rising prices of refined oil products, which were more than compensated by the falling prices of clothing and footwear due to winter sales. The 12-month average inflation, measured by the harmonised index of consumer prices, remained at 2.5% in January, which equals the December reference value of the price stability criterion. Given the current figures for the output gap, labour costs and other medium-term indicators, the Governing Board of the Bank of Slovenia assesses that the macroeconomic risks to price stability are limited, and that the inflation rate achieved in 2005 is sustainable. This is also confirmed by the low level of core inflation, which last year fluctuated at levels below 1%.

The gap between economic growth in the USA and in the eurozone is expected to diminish this year. Further evidence of an improvement of economic activity in the eurozone comes from the good figures for growth in industrial production and new orders. By contrast, there was a minor economic slowdown in the USA in the final quarter of last year, with GDP up only 0.3% from the third quarter. Inflation averaged 2.2% in the eurozone last year. Energy prices were responsible for inflation missing the ECB target, but core inflation remains relatively low. Inflation in the USA averaged 3.4% in 2005, but should ease slightly this year as a result of restrictive monetary policy. Oil prices cumulatively increase by approximately one-fifth in December and January, and they are currently above USD 60 per barrel.

Economic growth in Slovenia remained favourable in the final quarter of last year. The high growth recorded in industrial production and the construction sector in November indicates that real GDP growth in the final quarter will not deviate significantly from the average for the year. Household spending remains relatively strong, while the decline in net exports continued at the end of the year.

According to provisional figures, Slovenia’s public finance position last year was in line with the revision to the state budget. The budget deficit reached 1.4% of estimated GDP, while the general government deficit as measured by the ESA-95 methodology stood at 1.7% of GDP. Last year’s public finance position partly reflected the favourable macroeconomic conditions, in particular high household spending, which also had an impact on the amount of VAT revenue. In the coming years Slovenia will have to speed up its reduction of the structural deficit.