Bloomberg News

Serbian Central Bank Holds Rates After Kosovo Deal Rejected

April 11, 2013

Serbia’s central bank kept borrowing costs unchanged for a second month after failed talks on an accord with Kosovo jeopardized the Balkan nation’s chances of starting European Union membership talks soon.

The Narodna Banka Srbije in Belgrade left its one-week repurchase rate at 11.75 percent, matching the expectations of 12 of 24 economists in a Bloomberg survey. The same number of economists predicted a quarter-point to half-point reduction.

“The existing degree of monetary policy restrictiveness ensures that annual inflation, which slowed in the first quarter, will continue to decline and return” to the target band of 4 percent plus or minus 1.5 percentage points, the central bank said in an e-mailed statement.

Premier Ivica Dacic’s government rejected an EU-mediated agreement on normalizing relations with Kosovo on April 8 and called for further negotiations. Serbia, which is looking to start entry talks with the 27-nation bloc in June, needs deeper EU ties after the wars of the 1990s stunted its economy’s transition from communism.

Serbia is unlikely to get the date for the start of EU membership talks, Deputy Prime Minister Aleksandar Vucic said in Belgrade yesterday after meeting with German and French lawmakers who said the country should focus on making its reforms a success rather than focusing on the date for talks.

Weakening Inflation

Rate setters are encouraged by weaker inflationary pressures and export-led economic recovery, while future policy restrictiveness will depend on global financial markets and growth outlook in Serbia’s main export markets, the bank said today.

The central bank paused its tightening cycle on March 12 to assess price pressures before reducing borrowing costs to spur growth after the economy fell into its second recession in three years. The bank raised rates eight times in the previous nine meetings.

Policy makers pledged on Feb. 13 to consider changes to monetary policy as inflation pressures based on food and regulated prices ease. Vice-Governor Veselin Pjescic said the current rate level is sufficiently restrictive as long as the bank’s forecasts, including for an economic contraction of 0.1 percent and 2 percent inflation in the 17-nation euro area this year, are met.

The central bank is also fighting inflation with a stable dinar, Europe’s top performer against the euro in the previous six months with a 1.48 percent gain, according to data compiled by Bloomberg. It traded at 111.8242 at 9:38 a.m. in Belgrade, or 0.02 percent down on the day.

Regional Trend

Serbia’s rate trend contrasts with others in the region, where borrowing costs are falling to halt economic slowdowns amid Europe’s debt crisis. The National Bank of Serbia wants to ease price pressures stemming from regulated price increases and expanded dinar liquidity.

Inflation has been accelerating since April 2012, when it fell to a 30-year low of 2.7 percent, due to rising food costs amid a drop in farm output. The rate reached 12.4 percent in February and is expected to peak at 14 percent through April. The central bank wants to bring it down to 4 percent, plus or minus 1.5 percentage points, by December.

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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