Bloomberg News

Serbia Unexpectedly Holds Key Rate After IMF Urges Restraint (2)

July 11, 2013

Serbia Unexpectedly Holds Key Rate After IMF Urges Restraint

The Narodna Banka Srbije in Belgrade left its one-week repurchase rate at 11 percent, matching the forecasts of nine of 24 economists in a Bloomberg survey. Photographer: Oliver Bunic/Bloomberg

Serbia kept borrowing costs unchanged after cutting the benchmark rate for two consecutive months, surprising most economists as the International Monetary fund called policy easing premature.

The Narodna Banka Srbije in Belgrade left its one-week repurchase rate at 11 percent, matching the forecasts of nine of 24 economists in a Bloomberg survey. Thirteen predicted a quarter-point reduction and two saw a half-point cut.

“Unfavorable movements in international financial markets have led to higher investor risk aversion, which has sparked an increase in risk premiums and depreciation pressures almost throughout the region,” the central bank said in a statement on its website today.

The IMF urged restraint in further easing monetary policy while fiscal consolidation is implemented to avoid risks to inflation, the dinar and economic stability, the fund’s resident representative, Bogdan Lissovolik, was cited as saying by NIN magazine yesterday. The central bank said today that structural reforms and caps on budget spending will contribute to a further decline in inflation pressures.

The dinar traded at 113.8270 as of 4:05 p.m. in Belgrade, according to data compiled by Bloomberg, about 3 percent weaker than before the first rate cut on May 14. The central bank has intervened 15 times since May 30 to prop up the currency, selling 325 million euros ($423 million), according to its website.

Carry Trade

Keeping rates unchanged is needed to maintain the carry trade appeal of the Serbian currency and “ease pressures on the dinar from the past month,” Ratko Guduric, the deputy head of treasury at Vojvodjanska Banka AD in Belgrade, said by phone before the rate announcement.

Policy makers are balancing the need to shore up Serbia’s $37 billion economy against fighting inflation and shielding the dinar from market turmoil. The central bank last month surprised the majority of economists by lowering the benchmark rate a quarter point, bringing the total easing since May to 75 basis points.

Serbia cut borrowing costs for the first time in 16 months on May 14, reducing the benchmark rate by a half point to 11.25 percent. Investors sold off the dinar and the country’s bonds after the IMF said on May 22 that the budget deficit may reach 8 percent of economic output, more than double the initial target of 3.6 percent, unless the government takes steps to narrow it.

Dinar Pressure

Keeping the pressure off the dinar “was the only reason to leave rates unchanged,” Petr Grishin, an economist at VTB Capital in Moscow, said in a note to clients today. The central bank will continue with rate cuts as inflation subsides, allowing the government to take advantage of lower borrowing costs to meet its debt needs amid “poorer external funding prospects,” he said.

The yield on Serbia’s 10-year Eurobonds due in 2021 lost 14 basis points to 6.42 percent, data compiled by Bloomberg show. The main stock index closed 0.31 percent lower at 488.54 points.

Rate setters need to make sure policy easing does not hurt the dinar, Ivan Nikolic, member of the central bank Governor’s Council, the regulator’s supervisory body, said on July 9.

Inflation slowed to 9.9 percent in May, dipping below 10 percent for the first time in nine months. The central bank predicts the pace of price growth will slow to 4 percent plus or minus 1.5 percentage point by December.

Inflation Peak

The inflation rate peaked at 12.9 percent in October, fueled by regulated price increases and rising dinar liquidity, which forced the central bank to raise borrowing costs eight times in nine meetings through February even as the economy shrank.

Prime Minister Ivica Dacic’s Cabinet, which may be reorganized by its first anniversary on July 27, revised the 2013 budget, raising the deficit target to 4.7 percent of gross domestic product from an initially planned 3.6 percent. The Fiscal Council, a three-member body appointed by parliament to oversee budget compliance, sees the gap at about 6 percent of GDP.

“The only domestic factor that might make the NBS pause is if politics goes off track and the risk of early elections escalates,” Grishin said.

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


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus