Bloomberg News

Serb Central Bank Says Rate Moves Hang on Price, Fiscal Risk

February 14, 2012

(Updates with vice-governor’s comment in fourth paragraph, dinar in ninth, current account deficit in tenth paragraph.)

Feb. 13 (Bloomberg) -- The National Bank of Serbia is carefully monitoring price and exchange-rate pressures, fiscal policy risks and Europe’s debt crisis for the direction of its interest-rate policy.

After seven rate cuts since June to 9.5 percent, the Belgrade-based Narodna Banka Srbije left its two-week repurchase rate on hold on Feb. 9 amid renewed dinar weakness and reports the government froze a $1.3 billion precautionary loan program with the International Monetary Fund until parliamentary elections in May are over.

The bank expects weak demand as a result of high unemployment and “a deteriorating economic growth outlook” to keep inflation subdued during the first quarter, it said in a quarterly report in Belgrade today. Price pressures will probably increase after the elections and with the start of the new farming season, the report said.

“Annual inflation will be at its minimum in March or April,” Bojan Markovic, vice-governor of the central bank said in Belgrade today. “With the arrival of the new agricultural season, a stronger increase in regulated prices after elections and the end to caps on trade margins will lead inflation toward the target until the third quarter of 2012.”

The central bank targets the average inflation rate of 4 percent this year. Prime Minister Mirko Cvetkovic’s cabinet, who is headed for re-election in May, is struggling to keep the economy from returning to recession and to avoid further increase in the unemployment rate already at 23.7 percent.

Visible Recovery in 2013

The central bank cut its 2012 growth forecast to 0.5 percent from a previous estimate of 1.5 percent and a “more visible economic recovery is possible in 2013” which needs to be led by exports and investment, rather than consumption, Markovic said.

“We expect a modest growth in exports this year and any recovery will arrive with the revival of external demand,” Markovic said, adding that any effort to use “monetary policies to stimulate growth, historically ended with hyperinflation.”

The central bank will do all it can to smooth “excessive short-term oscillations” in the dinar exchange rate and make sure it doesn’t affect inflation. It seeks to ensure stability of the foreign-exchange market and will refrain from spending funds from foreign-currency reserves to “intervene to defend the level of the exchange rate,” as that would only help short- term investors or those with “poor liquidity management.”

Weaker Dinar

The present exchange rate of the dinar, which is the nominal exchange rate adjusted for inflation, is “somewhat weaker” from its long-term level, Markovic said, defining long- term as a period of between one and five years.

The dinar traded at 108.9000 at 11:49 a.m. in Belgrade, according to Bloomberg data.

One of the factors weighing on the dinar is an increase in Serbia’s risk premium measured by JP Morgan’s Emerging Market Bond Index (EMBI), which stood at 593 basis points in January, rising 160 basis points in the second half of 2011, it said.

The dinar is also affected by the widening current account gap of 9.1 percent of GDP at the end of 2011, more than the initial forecast of 7.5 percent of GDP, fueled by an increase in imports of equipment and raw materials in the last quarter of 2011. The central bank forecast the current account deficit to shrink to 8.4 percent of GDP this year as imports and investment inflows decline, said Snezana Vilaret, the head of central bank’s macroeconomic analysis unit.

--Editors: Elizabeth Konstantinova, Zoe Schneeweiss

To contact the reporter on this story: Gordana Filipovic in Belgrade at

To contact the editor responsible for this story: James M. Gomez at

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