Bloomberg News

Serbia May Cut Benchmark Rate as Focus Shifts to Growth and Jobs

October 05, 2011

Oct. 6 (Bloomberg) -- Serbia’s central bank will probably cut its benchmark interest rate for the fourth time since June as the bank’s focus shifts from taming inflation to promoting growth and employment.

The Narodna Banka Srbije will lower its two-week repurchase rate by a quarter-point today to 11 percent, according to 10 of 23 economists in a Bloomberg survey. Four predicted a half-point decrease and one sees a three-quarter point reduction, Eight forecast no change. The bank may announce the decision at about noon in the capital, Belgrade.

Europe’s debt crisis is curbing demand for Serbian exports, jeopardizing government plans to wean the economy off its dependence on foreign credit. While inflation has eased, growth in the Balkan nation, which is seeking to join the European Union, slowed to 2.2 percent from a year earlier in the second quarter from 3.7 percent in the first three months.

“Recent signals strongly point to slowing inflation, negative economic trends in the third quarter and high financing costs for the real sector,” said Aleksandra Vukosavljevic, head of research at Raiffeisenbank a.d. in Belgrade. “They may even cut by fifty basis points,” said Vukosavljevic, who forecasts a quarter-point decrease.

Central banks across the region have been weighing faltering growth prospects with weaker currencies. Poland left borrowing costs unchanged in September on expectations inflation will slow and the economy will weaken. Hungary kept its benchmark interest rate steady for an eighth month on Sept. 20, while the Czech central bank followed suit two days later.

Dinar, Inflation

Serbia last lowered borrowing costs on Sept. 8. Even after 1.25 percentage points of interest-rate cuts since June, the dinar has declined less than other regional currencies such as the zloty, closing at 101.71 against the euro yesterday compared with 100.81 June 30.

Inflation has slowed from April’s 14.7 percent peak to 10.5 percent in August. Policy makers are targeting a 4.5 percent rate plus or minus 1.5 percentage points at end-2011, dropping to 4 percent plus or minus 1.5 percentage points at end-2012.

“Reduced inflationary pressures may create room for further policy easing, but the National Bank of Serbia needs to remain vigilant to achieve its objective of bringing inflation back into its target band,” the International Monetary Fund said Oct. 3 after approving a new 1 billion-euro ($1.33 billion) precautionary loan.

The “most important problem is unemployment,” central bank Governor Dejan Soskic told an economic forum yesterday. “That can be dealt with only through a substantial increase in economic activity.”

While Prime Minister Mirko Cvetkovic’s cabinet is seeking to reduce unemployment and improve living standards as the ruling coalition gears up for elections next year, “it would take growth rates of 4 percent to 5 percent to create new jobs,” his economic adviser Jurij Bajec said.

Serbia’s economy will grow 2 percent this year and 3 percent in 2012, according to forecasts on the Washington-based IMF’s website.

--Editors: Andrew Langley, Alan Crosby

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

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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