Decisions adopted by the Governing Board on the occasion of its 317th regular meeting on 14 September 2005

At its meeting held on 14 September 2005, the Governing Board of the Bank of Slovenia kept the key interest rates of the Bank of Slovenia unchanged. The interest rate on 60-day tolar bills thus remains at 4.0% and the rate on the 7-day foreign exchange swap at 1.5%.
Based on the analysis of economic developments, the Governing Board of the Bank of Slovenia assesses the current monetary policy stance to be appropriate. The level of interest rates is consistent with maintaining the stability of the nominal tolar exchange rate against the euro and the price movements, as well as the medium-term inflationary expectations, in line with the medium-term price stability objective. The Governing Board of the Bank of Slovenia estimates that the inflation target related to the adoption of the euro will be met in time.

After a temporary slowdown in the first half of this year, a stronger growth of the world´s economy and recovery in the EU Member States are expected in the remaining of the year. The most relevant risk continue to be represented by the continuous increases in oil prices, already producing downward tendencies in consumption in the USA and some countries of the EU. Nevertheless, no major negative economic impacts are foreseen for the time being, since the financing conditions are relatively favourable and corporate earnings remain robust. Moreover, manufacturing business activities are no longer so heavily dependent on the movements in the prices of oil derivatives as they used to be at the time of the major oil shocks.

The growth rate of Slovene economy has increased to the level of its long-term average, after being markedly low in the first quarter of this year. Nevertheless, the output gap, which slightly narrowed last year, continues to remain negative and demand lagging behind supply acts in the direction of a decline in inflation. Indicators show that household consumption is strengthening and favourable developments are also present in the field of foreign trade.

The labour market developments deviate somewhat from the overall positive picture, with the number of the registered unemployed exceeding the level of last year in August and a relatively strong growth of labour costs. Recently, the latter has been gradually reducing the lagging of the growth of labour costs behind productivity that accumulated in the past years. Too high labour costs would worsen the competitiveness of the Slovene economy and would also be reflected in the tendency towards prices increases and in a reversal in the positive employment trend.

Monetary indicators show that the growth of the broad monetary aggregates (M2 and M3) continues to be moderate, while lending to households continues to be strong. Accelerated lending to households that has been present since the beginning of the previous year, is primarily a consequence of the favourable terms of lending and also coincides with the strengthening household consumption.

In the summertime, price movements were even somewhat better than expected. In Slovenia, the inflation in July was, measured by the harmonised index of consumer prices excluding energy, the fourth lowest in the EU. It remains necessary to monitor the consequences of a possible transmition of the prices of oil to those of other products, mainly in transportation activities. Irrespective of the recent exceptional circumstances that affect the supply of oil (Hurricane Katrina), the price movements of crude oil on international markets did not predict a relatively high jump of the prices of oil derivatives in Slovenia. Namely, after Hurricane Katrina, the prices of crude oil on international markets decreased to the level lower than the previous one. These increases in oil derivatives might affect inflation in September. However, the medium-term indicators, such as the output gap, real unit labour costs, the real effective exchange rate and producer prices, are either balanced or directed towards decreases in inflation.

The revised data that were brought in line with the European System of Accounts 1995 do not hinder the planned adoption of the euro. Nonetheless, the Governing Board of the Bank of Slovenia considers as vital the acceleration of fiscal consolidation also in the future. This involves reducing the structural deficit and providing sufficient safety margin, necessary to comply with the provisions of the Stability and Growth Pact once Slovenia becomes a full member of the Eurosystem.