Bloomberg News

Serbia Cuts Rate on Benign Price Outlook, Leaving Aside Politics

December 15, 2011

Dec. 8 (Bloomberg) -- Serbia’s central bank cut its benchmark interest rate for the sixth time since June on a benign outlook for prices, leaving aside concern about the impact of Europe’s debt crisis and the nation’s European Union candidacy.

The Narodna Banka Srbije chopped 25 basis points off the two-week repurchase rate, lowering it to 9.75 percent, contrary to a majority in the market who expected the rate-setters to hold the rate. Thirteen of 23 economists in a Bloomberg survey this week bet on an unchanged rate, while seven predicted a quarter-point reduction and three saw a half-point cut.

The Serbian central bank has “a strong reason for a significant cut” based on cumulative inflation from May to October, which stood at an annualized 2.4 percent, Jasna Atanasijevic, chief economist at the Serb unit of Austria’s Hypo-Alpe-Adria, said before the rate announcement.

The rate decision bucked the trend in eastern Europe, where central banks are still weighing faltering growth prospects against weaker currencies after tightening policy earlier this year.

Monetary authorities in Poland yesterday left the seven-day rate unchanged for a fifth meeting at 4.5 percent, while Hungary raised borrowing costs by 50 basis points to 6.5 percent on Nov. 29 to stem declines in the forint. The Czechs have left the benchmark two-week repurchase rate at 0.75 percent since May 2010 and said yesterday the next rate move may be in any direction depending on inflation risks.

Changing Outlook

The Belgrade-based National Bank of Serbia last cut its main rate by 75 basis points to 10 percent on Nov. 10 on concern Europe’s debt crisis may sour the economic-growth outlook. Serbia’s economy is forecast to grow 1.5 percent this year, down from an original estimate of 3 percent.

The economy expanded 0.7 percent in the third quarter from a year ago, down from 2.4 percent in the previous three-month period, while inflation slowed to 8.7 percent in October from a peak of 14.7 percent in April, outside the target rate of 4.5 percent 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.

An indicator the central bank can’t overlook is the outstanding repo stock, which expanded by 10 percent at a repo auction yesterday to almost 126 billion dinars ($1.63 billion), and the cost it pays to keep cash outside the banking system.

Dinar Weakens

The 250 basis points in rate cuts since June have so far resulted in a 5.58 percent decline in the dinar, which closed at 102.9975 to the euro yesterday, according to the central bank’s official fixing for the day.

The currency traded at 103.3976 to the euro at 10:15 a.m. in Belgrade, or 0.37 percent down on the day, according to Bloomberg data.

The policy relaxation ended seven months of dinar gains through May, totaling 11.7 percent against the euro for the period. The market sees the dinar ending the year at an average of 103.50 to the euro, representing a 1.9 percent full-year gain, according to a Bloomberg survey.

Serbian rate-setters met a day before EU heads of state and governments sit in Brussels to seek solutions to the ongoing sovereign debt crisis and debate enlargement issues, including Serbia, which has not fully convinced all EU members that it has done enough to qualify for the EU candidacy.

Germany remains opposed to granting Serbia candidacy arguing that the Balkan nation has not done enough to make peace with its former breakaway province of Kosovo. Serbian President Boris Tadic said in an article today that “Serbia could plunge to the darkness of nationalism if left outside the EU,” according to the statement posted on his website.

-- Editors: Douglas Lytle, James M. Gomez

NI SERBIA NI CEN NI GOV NI BUD NI EUROPE NI EM NI EEU NI ECO NI RP NI MMK NI MONETARY NI BMRMONET NI BALKANS NI EMD

-0- Dec/08/2011 10:21 GMT

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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