Central bank governor Sramko talks down crown.

Central bank governor Sramko talks down crown. The governor of the National Bank of Slovakia (NBS), Ivan Sramko, verbally intervened against the strong crown and stressed that it was firming too fast. The SKK/EUR rate continued to appreciate yesterday, reaching a new record level of 34.62. Its strengthening has been attributed to the favourable investor sentiments to the region as well as the solid macroeconomic fundamentals. Sramko, however, underlined that with the recent gains the crown was already overvalued. He explained that besides economic factors, the exchange rate was affected by low market liquidity. It caused large swings in the crown exchange rate even with small traded volumes. Sramko did not specify whether the central bank intended to intervene against the strong local currency, which is already close to the upper limit of its 15% range around the ERM II central parity of 38.455. Nevertheless, the crown corrected after the verbal intervention, closing at 34.75. In our opinion, the statement of the governor is actually the first step of the bank in this direction. As an immediate reaction, we expect that the NBS would refrain from raising the key interest rates at its policy meeting at the end of this month and in case the appreciation rate of the crown does not moderate we do not rule out direct market interventions to protect the ERM II participation. In case the crown breaches the 15% range around the central parity, it would definitely be excluded from consideration for joining the eurozone from the beginning of 2009 as planned.