Serbia May Cut Rates Seventh Time Since June as Inflation Slows

Serbia’s central bank probably will cut its benchmark interest rate for the seventh time since June as evidence of an economic slowdown emerges and inflation remains tame.

The Belgrade-based Narodna Banka Srbije will lower its two- week repurchase rate by a quarter of a percentage point to 9.50 percent when policy makers meet on Jan. 19, according to 13 of 23 economists in a Bloomberg survey. Two predicted a half-point cut to 9.25 percent, seven expected the bank to hold rates and one called for rates to rise.

The National Bank of Serbia is evaluating the effect of Europe’s sovereign debt crisis on the domestic economy to decide on the future direction for monetary policy. Slowing inflation allowed it to cut the main rate to 9.75 percent on Dec. 8 and a weakening economy may encourage more policy easing, analysts said.

Policy makers have “already said that easing is the policy direction as disinflation continues,” said Predrag Stojanovic, the head of treasury at the Belgrade-based unit of Greece’s Piraeus Bank SA. (TPEIR)

Gross domestic product grew 0.5 percent in the third quarter, following a 2.5 percent pace in the previous three- month period. The International Monetary Fund’s Bogdan Lissovolik said on Dec. 6 that the prospects for 2012 growth are lower because of an expected slowdown in exports to the European Union.

Inflation Slowdown

The inflation rate in December fell to 7 percent, the lowest rate since August 2010, compared with 8.1 percent in November. The central bank expects inflation to slow toward its target of 4.3 percent, plus or minus 1.5 percentage points at the end of March and see the annual rate at 4 percent, plus or minus 1.5 percentage points, by year’s end.

Risks to the inflation target include the dinar’s exchange rate, regulated price increases and a stalled drive to increase the share of dinar transactions in the banking system, Stojanovic said.

While weakening industrial output, slowing trade, unemployment, and a three-month high repo stock suggest a cut, the central bank should consider the dinar’s depreciation before making a move, said Dusko Vasiljevic of the CEVES economic research institute, the only economist who called for a rate increase.

The dinar slumped to 107.07 to the euro at the end of 2011. It has stabilized at between 104 and 105 against the common currency this month.

Economists in the survey forecast a dinar rate at 103.50 to the euro at the end of January and 104 one month later. The dinar traded at 104.56 at 10:58 a.m. in Belgrade, according to Bloomberg data.

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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