Bloomberg News

Serb Central Bank Cuts 2-Week Repo Rate by Half-Point to 12%

June 09, 2011

(Updates with Barclays’ dinar forecast in sixth, seventh paragraphs.)

June 9 (Bloomberg) -- Serbia’s central bank cut its benchmark interest rate, the second highest in Europe, by half a percentage point amid signals inflation will slow in the coming months.

The Belgrade-based Narodna Banka Srbije lowered the two- week repurchase rate to 12 percent, the first cut since May of last year. Three of 22 economists forecast the move in a Bloomberg survey, while three others expected a quarter-point rate reduction and 15 saw no change. One expected a quarter- point increase.

Policy makers around the world are battling to stem inflation sparked by high global food and energy prices. Serbia’s central bank estimates inflation peaked in May or June and inflationary pressures may subside during the summer as a result of comparative effects. Economic growth is expected to accelerate to 4.5 percent in 2012 from 3 percent in 2011, mainly led by Fiat SpA investment into a new assembly plant.

“The cut in the benchmark interest rate was necessary to stabilize inflation around the target over the medium term,” the bank said in a statement on its website.

The dinar advanced 0.5 percent after the rate decision as investors rushed in to take advantage of higher yields before the bank lowers borrowing costs further. The currency traded at 97.85 to the euro at 1:34 p.m. in Belgrade, up from 98.25 at 12:05 p.m., according to Bloomberg data.

Dinar Gains

London-based Barclays Capital said “the turnaround in the cycle has been unusually quick” as the “NBS stayed on hold only for one month before starting to cut rates,” London-based Barclays Capital said in a note to clients.

The central bank will probably cut its benchmark between 1.5 percentage points to 2 points in the third quarter, Barclays said, and lowered its three-month forecast for the dinar to 95 from 101.

The dinar may come under pressure to weaken in the short term because of the current-account gap, Barclays said. The scope for the weakening should be offset by the country’s EU convergence process and a new precautionary loan deal with the International Monetary Fund.

High interest rates in 2011 have attracted investors to Serbia, pushing the dinar up 8.4 percent against the euro this year, turning the currency into world’s top performer in 2011.

Local Debt

“Investors will remain even keener on investing into local debt as they try to book profits before the new rate cut, which we don’t view as likely to happen at the next meeting, but the downward movement in the key rate is a clear scenario now,” Raiffeisenbank in Belgrade said in a note after the decision.

Consumer prices grew an annual 14.7 percent in April, the most in 37 months and more than double the limit of the central bank’s 3 percent to 6 percent target range. Governor Dejan Soskic was quoted by the Blic newspaper as saying yesterday that he expects ‘good results’’ in inflation data to be released on June 13.

The slowdown of inflation in the coming months will mainly be caused by a “good harvest, weak aggregate demand and monetary policy measures taken to date,” the bank statement said.

Vladimir Vuckovic, a member of Serbia’s Fiscal Council, said the rate “decision is timely and the size of the cut sufficient, considering that this is only the first step.”

“I hope the government will also follow suit with yields on its debt,” he added.

A year after its economy grew 1.8 percent following its worst recession in a decade, Serbia is still struggling to kick start growth as domestic demand stays weak and industrial output falters.

In today’s debt auction, the Debt Management Agency reported demand at 2.59 billion dinars for 2 billion dinars worth of debt on sale, with average yields inching down to 12.49 percent from 12.79 percent at May 26 auction of the same maturity.

--Editor: James M. Gomez

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: Alan Crosby at acrosby1@bloomberg.net


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