Serbian Central Bank Leaves Benchmark Rate at 9.5 Percent

Serbia’s central bank left its benchmark interest rate unchanged for a third month as policymakers look to a new government following May 6 general elections for future policy direction.

The Belgrade-based Narodna Banka Srbije kept its two-week repurchase rate at 9.5 percent, matching the forecast of 15 of 23 economists in a Bloomberg survey. Three saw the need for a rate increase while five expected a reduction. Governor Dejan Soskic will hold a briefing at 2 p.m. in Belgrade.

Serbia is trying to avoid a second recession in three years at a time the nation prepares to vote for a new president, parliamentary lawmakers and local representatives. The main rate has been shaved by a total of 3 percentage points since last June to contain the economic slowdown that has been triggered by Europe’s debt crisis.

“With a view to uncertainty over import prices, the new agricultural season and probably faster pace of growth of regulated prices in the second half of the year,” the bank’s management “decided to keep the reference rate unchanged,” the central bank said in an e-mailed statement.

Rate-setters based their decision on a benign inflation outlook for April, when they expect consumer prices will be “at a minimum” with “low aggregate demand still the key disinflationary factor.”

The bank targets inflation at 4 percent, plus or minus 1.5 percentage points, at the end of 2012. The inflation rate was 3.2 percent in March, compared with 4.9 percent in February, though price pressures may emerge in the second half of the year, according to central bankers and analysts.

Policy Instruments

The central bank has shifted its focus to other policy instruments as it tries to encourage banks to lend more to cash- strapped companies amid sinking industrial and export activity.

Following months of pressure from businesses, the National Bank of Serbia amended reserve requirement rules. While the measure will release foreign-currency liquidity, the central bank will proportionately drain dinar assets to avoid pressures on inflation.

The central bank lowered mandatory reserves to 29 percent from 30 percent for foreign-currency assets of up to two-year maturity and to 22 percent from 25 percent for longer-dated assets. It also raised the dinar part of this reserve requirement by five percentage points to 20 percent for shorter maturities and to 15 percent for longer dated assets.

This should stabilize inflation, contribute to lower cost of credit and easier refinancing, stabilize the foreign exchange market and encourage banks to search for longer-dated sources of financing, the central bank said.

The central bank’s room to adjust interest rates, its key policy instrument, has been limited by concerns about the ability of the incumbent government of Prime Minister Mirko Cvetkovic to keep fiscal policies intact after it already slipped on targets in the first two months of the year, analysts 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

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