Bloomberg News

Serbia May Cut Benchmark Rate as Growth Slows to 18-Month Low

November 09, 2011

Nov. 9 (Bloomberg) -- Serbia’s central bank will probably cut its benchmark interest rate for a fifth time since June on signs economic output was the weakest in 18 months during the third quarter.

The Narodna Banka Srbije will lower its two-week repurchase rate by a quarter-point tomorrow to 10.5 percent, according to 9 of 23 economists in a Bloomberg survey. Six predicted a half- point reduction and eight forecast no change. The bank may announce the decision at about noon tomorrow.

“With their focus on inflation, which is declining, the central bank has room for more cuts and they are also trying to lower the cost they pay in repo operations,” said Predrag Stojanovic, head of the Treasury department at lender Piraeus Banka AD in Belgrade.

Central banks in the European Union’s eastern members are weighing faltering growth prospects against weaker currencies after tightening policy earlier this year. Monetary authorities in Poland left the seven-day rate unchanged for a third meeting at 4.5 percent on Oct. 6, while Hungary kept its benchmark rate steady at 6 percent for a ninth month on Oct. 25. Romania bucked the trend, cutting the EU’s highest rate by a quarter-point to 6 percent.

The outstanding amount of cash the Serbian central bank drained from the banking system in repurchase auctions soared to 112.47 billion dinars on Nov. 2, the most since a Sept. 21 repo auction, according to central bank figures.

Inflation has slowed to 9.3 percent in September from April’s 14.7 percent peak, still outside the target of 4.5 percent rate plus or minus 1.5 percentage points for the end of the year, and 4 percent, plus or minus 1.5 percentage points, at end-2012. The Belgrade-based central bank says inflation may return to its target in the first quarter of 2012.

The economy also grew 0.7 percent in the third quarter, a flash estimate showed, slowing from growth of 2.4 percent in the preceding three-month period. Still, the scope for more cuts in Serbia is probably narrowing with the approaching winter when disinflationary price pressures traditionally subside, Stojanovic said.

Currency Trend

Serbia last lowered borrowing costs on Oct. 6. Even after 1.75 percentage points of interest-rate cuts since June, the dinar has not declined as much as other currencies in the region which have been affected by the Greek debt crisis and investors moving to safer assets.

The dinar has declined 1.6 percent since June 30 to close at 102.41 to the euro yesterday, compared with a 13.8 percent fall in the Hungarian forint during the same period.

The Belgrade-based National Bank of Serbia should consider the “ongoing market volatility and uncertainty over the crisis in Greece” when it meets later this week, said Aleksandra Vukosavljevic, the head of research at Raiffeisen Zentralbank Oesterreich AG’s unit in Belgrade, who expects no rate change.

“There’s too much volatility, and perhaps, it’s time for the market to stabilize and adjust before any further cuts,” she said, adding that a quarter-point rate cut would be the maximum the bank can tolerate as a “clear signal that the relaxation trend is still ongoing, but at a slower pace,” she said.

--Editors: Douglas Lytle, 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: James M. Gomez at jagomez@bloomberg.net


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