(Updates with Soskic’s comments on inflation, savings, dinar-denominated Eurobond starting from third paragraph.)
Oct. 10 (Bloomberg) -- Serbia’s central bank probably will continue cutting borrowing costs as the inflation rate drops to below 10 percent and economic growth falters, central bank Governor Dejan Soskic said.
Lowering rates would be in line with an increasingly benign inflation outlook, largely resulting from a favorable base effect last year, when the price of goods grew at a stronger pace. The Oct. 12 report on September inflation may show consumer prices dropped for the fourth-straight month.
“We have been on a downward path for several months now” and the central bank cannot rule out that the benchmark rate will continue to move “in line with inflation,” Soskic told reporters today in Belgrade.
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. The National Bank of Serbia dropped its two-week repurchase rate to 10.75 percent on Oct. 6, the fourth reduction since June, as the focus shifts to faltering growth and rising unemployment before elections next year.
The economy “appears to have recovered” in the third quarter, with seasonally adjusted growth at 0.5 percent from the same period of the previous year, he said.
Seasonally adjusted figures showed growth of 1.6 percent in the first three months of the year and a 0.1 percent contraction in the second quarter of 2011.
Absence of Shock
“In the absence of excessive economic shocks in 2012,” economic growth next year should return to levels seen in 2008, before the global financial crisis sparked a recession, he said. In four years through 2008, Serbia posted average annual growth of 4.5 percent.
Growth should continue to be driven by investments rather than consumption, he said. The International Monetary Fund has revised its forecast for Serbia’s 2011 growth to 2 percent from 3 percent, picking up pace in 2012 to 3 percent, still down from an originally forecast 4.5 percent.
In order to keep the cost of bank lending “moderate,” Soskic urged banks to refrain from offering too-high deposit rates during the traditional savings week in early November.
Banks in Serbia, most of them owned by foreign financial institutions, paid 4 percent to 7 percent a year on euro- denominated deposits in 2010 and Soskic said such deposit rates are “excessive.”
He said he would like to see a “gentlemen’s agreement” with bankers rather than administrative caps on deposit rates when they meet later this month. The nation of 7.5 million people holds 7.5 billion euros ($10.2 billion) in savings with banks.
Soskic said Serbia has no need any time soon to offer a dinar-denominated Eurobond to finance its budget gap or refinance public debt.
Its debut U.S. dollar-denominated Eurobond sold last month with a 7.25 percent coupon, covered the government’s financing needs well into the first half of 2012 and is expected to be included in the JP Morgan Chase & Co’s EMBIG index as of end- October.
--Editors: James M. Gomez, Balazs Penz
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