Bloomberg News

Serbia Will Probably Leave Rates Steady as It Offers Cash

July 10, 2012

Serbia’s central bank will probably keep its benchmark interest rate on hold after raising it last month and offer banks cash to ease a liquidity strain and support the sluggish economy.

The Belgrade-based Narodna Banka Srbije will leave its two- week repurchase rate at 10 percent at a meeting on July 12, following a half-point increase on June 7, according to 12 of 23 economists in a Bloomberg survey. Two expect a quarter-point rate rise and nine a half-point boost, according to the survey.

With the euro region slipping toward a recession amid budget-cutting austerity measures and a flare-up of the debt crisis, governments across Europe have been putting off rate increases and considering easing to help their struggling economies.

“The central bank should not raise the rate again considering the overall economic situation,” said Jasna Atanasijevic, chief economist at the Belgrade-based Hypo Alpe Adria AD bank. “Besides, they are expected to launch direct repo operations and they will need time for a market reaction before deciding to raise the rate again.”

Serbia’s gross domestic product shrank 1.3 percent in the first quarter while the fiscal gap widened to 7.3 percent of GDP in April and public debt reached at 51.1 percent of GDP at the end of March, exceeding the government’s self-imposed 45 percent limit. Inflation accelerated to 3.9 percent in May from a 30- year low of 2.7 percent in April.

Political Turmoil

Serbia’s central bank has urged lawmakers to quickly form a government following inconclusive May 6 general elections to trim the budget gap and limit public debt. Such moves would help avoid a further weakening of the dinar and make room to reduce interest rates to spur an economic recovery, bank officials have said.

The dinar is the fifth-worst performing currency among the 178 tracked by Bloomberg worldwide since the elections, falling 3 percent against the euro. It traded at 115.2498 per euro at 1:30 p.m. in Belgrade.

The central bank raised its main rate in June amid signs that import prices were spurring inflation. It also tightened reserve-requirement rules to drain liquidity from the market because of depreciation pressures on the dinar and the government’s fiscal expansion that saw the five-month budget deficit widen 80 percent from a year ago.

The bank is expected to shift toward more active liquidity management in July by offering banks cash via direct repo operations for the first time since inflation targeting was introduced in August 2006. For six years, the central bank used repo operations to drain excess liquidity from banks.

To contact the reporters 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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