Bloomberg News

Serbia Cuts Main Interest Rate as Debt Crisis Weakens Growth

October 06, 2011

(Updates with Hypo Alpe Adria comment in seventh paragraph, Treasury bill yield drop in ninth.)

Oct. 6 (Bloomberg) -- Serbia’s central bank cut its benchmark interest rate for the fourth time since June after an easing of inflationary pressures created room for lower borrowing costs amid an economic slowdown and high unemployment.

The Narodna Banka Srbije decreased its two-week repurchase rate by a half-point to 10.75 percent, the lowest in a year, matching the expectations of four of 23 economists in a Bloomberg survey. Ten forecast a quarter-point decline while one saw a three-quarter point cut and eight no change.

“Inflation is on a downward path” the bank said in a statement after the decision. Weak aggregate demand will remain the “key disinflationary factor” while global concerns and domestic fiscal worries are the main risks that will shape future rate decisions, the Belgrade-based bank said.

Europe’s slowing economy and the ongoing debt crisis have already weighed on demand for Serbian exports. Growth in the Balkan nation, which aspires to become a European Union candidate this year, slowed to 2.2 percent in the second quarter after a revised 3.7 percent growth in the first three months.

The National Bank of Serbia last cut borrowing costs on Sept. 8 amid an increasingly benign inflation outlook. The bank targets an inflation rate of 4.5 percent, plus or minus 1.5 percentage points, at the end of 2011 and 4 percent, plus or minus 1.5 percentage points, at the end of 2012.

IMF Agreement

The International Monetary Fund said earlier this week there is room for further policy easing as long as inflation continues to move to within the target band.

“The bigger cut than expected is still not a major surprise, especially after the IMF last week approved a new stand-by agreement for Serbia and said that Serbia has room to cut rates more as inflationary pressures ease,” Elisabeth Andreew, a Copenhagen-based strategist at Nordea Bank AB, wrote in an e-mail to clients today. “We expect to see further rate cuts in 2011, but the amount will depend on the pace of inflation slowing.”

The economic slowdown may open up space for more rate cuts in the coming months, analysts at Zagreb-based Hypo Alpe Adria Bank said in a note to clients, adding the benchmark rate may fall to 10 percent by the end of 2011.

Yields Fall

Alpe Adria and Raiffeisen Bank in Belgrade said the approval of a 1 billion-euro ($1.32 billion) precautionary loan by the IMF and the sale of a debut Eurobond worth $1 billion in September also allowed the central bank to cut more than analysts expected, helping the government lower its own borrowing costs. The yield on three-month Treasury bills dropped 30 basis points to 11.6 percent in an auction today as investors sought to buy 1.5 times more debt than offered.

The dinar was little changed at 101.62 to the euro at 3:26 p.m. in Belgrade.

Inflation slowed from a peak of 14.7 percent in April to 10.5 percent in August and the market sees the consumer price index, where food accounts for more than a third of the basket, at a nine-month low of 9.6 percent in October, according to a Bloomberg survey.

Food prices have stabilized and increases in regulated prices have slowed, the central bank said in today’s statement. September’s inflation rate “is expected in the single digits,” it said.

--Editors: Alan Crosby, Peter Branton

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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