Serbian Central Bank Holds Interest Rate Amid IMF Deadlock, Dinar Weakness

Serbia’s central bank kept its main interest rate on hold for the first time since September amid renewed dinar weakness and reports the government won’t come to terms with the International Monetary Fund on the 2012 budget.

The Belgrade-based Narodna Banka Srbije left its two-week repurchase rate at 9.5 percent, matching the expectations of 10 of 23 economists surveyed by Bloomberg. Twelve predicted a quarter-point cut and one a half-point reduction.

Policy makers, weighing the domestic fiscal situation and Europe’s sovereign debt crisis against a weakening dinar, which fell to an all-time low of 109.599 per euro at 12:16 p.m. The central bank sold 43.5 million euros ($57.8 million) at a “cut- off” rate of 108.6000 to the euro. The dinar traded at 108.7132 at 3:57 p.m. in Belgrade.

“Keeping the budget deficit within the framework earlier agreed with the IMF would serve as an additional safeguard of macroeconomic stability and leave more scope for future relaxation of monetary policy,” the bank said in a statement.

Serbia is struggling to keep the economy from returning to a recession. The central bank cut its growth forecast for this year to 0.5 percent, according to the statement, from a previous estimate of 1.5 percent, citing a “probable recession in the euro area that will slow the pace of Serbia’s economic growth.”

Weak Demand

Gross domestic product expanded 0.8 percent in the last quarter of 2011 from a year earlier, compared with 3.7 percent at the beginning of last year. The IMF is also expected to lower its 1.5 percent growth forecast for Serbia as the debt crisis weakens demand for the Balkan nation’s exports and weighs on capital inflows.

The government and officials from the Washington-based lender agreed today to keep a $1.3 billion precautionary loan program frozen, Prime Minister Mirko Cvetkovic said in a statement today, adding that his Cabinet will stick with fiscal- deficit and public-debt targets agreed under the program.

An IMF mission arrived in Belgrade for a week-long check on Serbian finances on Feb. 2, two weeks after the lender’s board delayed approval of the first review under the program, granted last September. They are concerned about borrowing and sovereign guarantees that “deviate” from program targets by around 1 percentage point of GDP, or close to $400 million.

‘Heads in Sand’

“The IMF appears to be being overly aggressive in my mind, especially given the global context and the fact that Serbia is going to elections,” Tim Ash, the global head of emerging markets research and strategy at RBS, said in e-mailed comments. “The fund seem to be operating with their heads in the sand.”

The mission may return “around mid-year,” according to Cvetkovic’s statement.

The dinar’s decline may reflect investor concern over the IMF loan, Vladimir Vuckovic of the Serbian Fiscal Council, a three-member body appointed by parliament to monitor whether the government complies with self-imposed fiscal rules, said by phone on Feb. 7.

Any further dinar weakening “may keep the central bank’s hands tied,” he said.

The National Bank of Serbia last cut the rate on Jan. 19 by a quarter-point after inflation slowed to 7 percent in December from a peak of 14.7 percent in April. The central bank sees the inflation rate hovering at its target mid-point of 4 percent by year’s end.

Policy makers will remain “cautious not to overdo” rate cuts to keep inflation pressure in check, central bank Vice Governor Bojan Markovic said in a Jan. 17.

Without the IMF, Serbia risks stalling economic growth, a credit rating downgrade and pressure on external liquidity and the dinar, Stojan Stamenkovic, chief macroeconomist at the Belgrade-based Economics Institute said on Feb. 7.

Prime Minister Mirko Cvetkovic’s government, facing elections by May, is struggling to maintain living standards as the economy sputters because of weak demand abroad for Serbian goods amid Europe’s debt crisis.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net Misha Savic in Belgrade at msavic2@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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