Serb Central Bank Holds Rate Amid IMF Deadlock, Dinar Weakness
February 10, 2012, 9:30 AM ESTBy Gordana Filipovic
Feb. 9 (Bloomberg) -- Serbia’s central bank kept its main interest rate on hold for the first time since September amid renewed dinar weakness and reports the government won’t come to terms with the International Monetary Fund on the 2012 budget.
The Belgrade-based Narodna Banka Srbije left its two-week repurchase rate at 9.5 percent, matching the expectations of 10 of 23 economists surveyed by Bloomberg. Twelve predicted a quarter-point cut and one a half-point reduction.
Policy makers are weighing the domestic fiscal situation and Europe’s sovereign debt crisis against a weakening dinar, which fell to an all-time low of 109.2625 against the euro at 10:04 a.m. in Belgrade.
“The magnitude of dinar weakness lately signals that the NBS might, after all, leave the two-week repo rate unchanged at 9.5 percent,” Hypo Alpe Adria Bank analyst Hrvoje Stojic said in a note to clients today. “The rationale is to avoid extra forex volatility against delayed IMF support.”
Serbia is struggling to keep the economy from returning to a recession. Gross domestic product expanded 0.8 percent in the last quarter of 2011 from a year earlier, compared with 3.7 percent at the beginning of last year. The International Monetary Fund is expected to lower its 1.5 percent growth forecast for Serbia as the debt crisis weakens demand for the Balkan nation’s exports and weighs on capital inflows.
IMF Mission
An IMF mission arrived in Belgrade for a week-long check on Serbian finances on Feb. 2, two weeks after the lender’s board delayed approval of the first review under the program, granted last September. They are concerned about borrowing and sovereign guarantees that “deviate” from program targets by around 1 percentage point of GDP, or close to $400 million.
The Belgrade-based newspaper Politika and the weekly publication NIN reported today that the IMF and government may remain deadlocked on talks about a revision to this year’s budget as the ruling coalition lacks a majority in parliament.
The dinar declines may reflect investor concern over whether Serbia keeps its $1.3 billion precautionary loan program with the IMF in force, Vladimir Vuckovic of the Serbian Fiscal Council, a three-member body appointed by parliament to monitor whether the government complies with self-imposed fiscal rules, said by phone on Feb. 7.
‘Hands Tied’
Any further dinar weakening “may keep the central bank’s hands tied,” he said.
The National Bank of Serbia last cut the rate on Jan. 19 by a quarter-point after inflation slowed to 7 percent in December from a peak of 14.7 percent in April. The central bank sees the inflation rate hovering at its target mid-point of 4 percent by year’s end.
Policy makers will remain “cautious not to overdo” rate cuts to keep inflation pressure in check, central bank Vice Governor Bojan Markovic said in a Jan. 17.
Without the IMF, Serbia risks stalling economic growth, a credit rating downgrade and pressure on external liquidity and the dinar, Stojan Stamenkovic, chief macroeconomist at the Belgrade-based Economics Institute said on Feb. 7.
Prime Minister Mirko Cvetkovic’s government, facing elections by May, is struggling to maintain living standards as the economy sputters because of weak demand abroad for Serbian goods amid Europe’s debt crisis.
--Editors: Alan Crosby, James Gomez
To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net Misha Savic in Belgrade at msavic2@bloomberg.net
To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net
