Bloomberg News

Serbia Holds Interest Rates Before New Cabinet Is Formed

May 10, 2012

Serbia’s central bank left its benchmark interest rate unchanged for a fourth month as rate- setters wait for a new government to be formed after May 6 elections.

The Belgrade-based Narodna Banka Srbije kept its two-week repurchase rate at 9.5 percent, matching the forecast of 18 of 22 economists in a Bloomberg survey. One predicted a half-point rate increase, while two expected a quarter-point advance and one a cut to 9.25 percent.

“The direction of the reference interest rate” in the coming months will “largely depend on the pace and intensity of fiscal consolidation” by the government, along with the resumption of the program with the International Monetary Fund, the bank said in an e-mailed statement.

The bank needs to balance bolstering growth with maintaining external liquidity after spending more than 750 million euros ($971 million) this year to prop up the dinar. The currency traded at 112.3039 per euro at 12:11 p.m. in Belgrade, close to its weakest in a decade, and has dropped 6.7 percent since January, data compiled by Bloomberg show.

Euro Sales

The central bank sold euros today before the rate announcement to curb renewed dinar declines, according to three traders in Belgrade who asked to remain unidentified, in line with the policies of their banks.

Incumbent Boris Tadic faces a May 20 presidential runoff against opposition leader Tomislav Nikolic, who opposes cuts in spending as voter anger at austerity measures sweeps across Europe. While Nikolic’s Progressives won parliamentary elections by less than 2 percentage points, Tadic’s Democrats agreed with the third-place Socialists of former strongman Slobodan Milosevic to continue to work together to form a new government.

“We expect the bank to postpone any moves until a new government is formed and there is more certainty on future policies,” Societe Generale SA’s analysts, including Sanja Rajkovic, said in a note to clients today before the decision.

Weighing Factors

Policy makers across Europe are weighing economic-growth prospects against inflationary pressures as the continent grapples with a sovereign-debt crisis.

Poland unexpectedly raised borrowing costs by a quarter- point to 4.75 percent yesterday to tame inflation. Hungary kept its two-week deposit rate at 7 percent for a fourth month in April. Romania’s central bank has cut the benchmark interest rate four times since November to 5.25 while Czech policy makers have left the two-week repurchase rate at a record-low 0.75 percent since May 2010.

Russia’s central bank refrained from cutting interest rates for a fifth month today, signaling a reluctance to deploy monetary stimulus after Vladimir Putin returned to the country’s presidency with the goal of accelerating growth.

Price pressures will start building in the coming months with “the arrival of a new agricultural season, an increase in import costs from a previous period and a rise in regulated prices in the second half of the year,” the central bank said in today’s statement.

Serbia cut interest rates by a total of 3 percentage points from June to December last year to contain an economic slowdown triggered by Europe’s debt crisis. The Balkan nation wants to avoid a second recession in three years after its economy contracted 1.3 percent from a year earlier in the first quarter.

No Immediate Move

A growing number of economists polled by Bloomberg, including Jasna Atanasijevic, the chief economist at the Belgrade-based Hypo Alpe Adria Bank AD, see a need for higher rates to keep foreign-currency reserves from falling to a level which the International Monetary Fund considers unsafe. “They need to boost carry attractiveness of the dinar and save the reserves,” she said in a May 8 phone interview.

The new government must quickly revise the budget and reduce the fiscal deficit to 4.25 percent of economic output to convince the IMF of its commitment to maintaining macroeconomic stability. The Washington-based lender suspended a $1.3 billion precautionary loan in February on concern Serbia would breach agreed borrowing targets.

The government has not updated the budget figures since February, when the two-month deficit exceeded a target the IMF marked as an indicator of Serbia keeping its fiscal policies on track. Without a policy change, the fiscal gap is expected to reach 5.7 percent of GDP by the end of 2012, the Economics Institute said on May 8.

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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