Decisions adopted by the Governing Board on the occasion of its 323rd regular meeting on 01 December 2005

At its meeting on 1 December 2005, the Governing Board of the Bank of Slovenia left the bank´s key interest rate unchanged. The interest rate on 60-day tolar bills remained at 4.0%, while the foreign exchange swap rate remained at 1.5%. 
Based on analysis of economic trends, the Governing Board considers the monetary policy as appropriate. The level of interest rates is in line with the stability of the nominal exchange rate of the tolar against euro, while current price trends and the medium-term inflation expectations are in line with the target of medium-term price stability. The Governing Board assesses that the inflation target for adopting the euro will be met on time.

Economic growth in the eurozone in the third quarter has accelerated relative to the first half of the year. The current rate of economic growth in the third quarter reached 2.4% at an annual basis. Germany and France contributed most to that growth, the former with growth in exports and industrial production, and the latter with growth in private spending. Export growth has been driven by the favourable economic conditions in the US and Asia, and increased price competitiveness due to the depreciation of the euro against the dollar. The European Commission has published its autumn 2005 economic forecasts, with growth expected to pick up gradually until the second quarter of 2007.

Inflation exceeding the ECB target and the gradual increase in core inflation have raised expectations about an increase in interest rates in the eurozone. Despite the fall in oil prices, energy prices continue being the main source of high inflation growth in the eurozone and the US in November. The risk of keeping inflation in the eurozone at a relatively high level has also been strengthened by the euro´s depreciation against the dollar, the rise in import prices and high growth in monetary aggregates. The persistence of inflation levels above the ECB target could be transmitted to a greater extent into core inflation, labour costs and inflationary expectations. Therefore, the ECB raised its key interest rate by 0.25 percentage points on 1 December 2005. In the US, interest rates have been rising for some time while inflation has exceeded 4% in the last two months.

According to estimates, Slovenia continued to have relatively high economic growth in the third quarter. Short-term indicators reveal relatively strong household spending which will probably be the main engine of economic growth in the third quarter. The current rate of growth in industrial production has slowed down, particularly in labour-intensive sectors, while it has increased at the fastest in export-oriented sectors.

Concerning the labour market, the decline in output of labour-intensive sectors coincides with the decline in employment in those sectors. Since job destruction in sectors with less perspective currently outpaces the job creation in sectors in progress, unemployment is on the rise. In October, the number of registered unemployed reached its highest level for the past year and a half. Similarly, the ILO definition unemployment rate rose in the third quarter. The persistence of relatively high growth in nominal wages could increase labour unit costs, worsen price competitiveness of firms and slow down the creation of new vacancies.

The year-on-year inflation rate in November decreased back to 2.1%, after the fall in oil prices which caused a significant rise in inflation in the previous two months. By the end of November, refined petroleum products were in average cheaper by 7.9% decreasing year-on-year inflation rate by 0.7 percentage points. Until October, growth in producer prices had fallen to 1.8%, which is equal to the unchanged rise of consumer goods prices. This points to a lowering of the risk of these prices being transmitted into overall inflation. The Governing Board assesses that other macroeconomic risks, such as excessive spending and excessive growth in labour costs, are limited in the short term. This is confirmed by the relatively low level of core inflation, which is fluctuating at around 1% year-on-year. The main risk of Slovenia failing to meet the reference criteria for introducing the euro is presented by further significant rises in the prices of refined petroleum products.