Serb Central Bank to Hold Rate as Policy Direction Uncertain

Serbia’s central bank will probably keep its benchmark interest rate on hold after raising it twice in the past two months amid uncertainty over policy direction following changes to central bank law and its management.

The Belgrade-based Narodna Banka Srbije will leave the one- week repurchase rate at 10.25 percent tomorrow, following a quarter-point rise on July 12, according to 12 of 23 economists in a Bloomberg survey. Ten expect a quarter-point increase and one sees a half-point boost, according to the survey.

Governments across Europe have considered easing rates to help their struggling economies as the euro region slips toward a recession amid budget-cutting austerity measures and a flare- up of the debt crisis.

Serbian rate-setters meet tomorrow “at a very unfortunate moment,” said Ljiljana Grubic, chief analyst at the Belgrade- based Raiffeisen Banka AD. “It won’t be a surprise if they held the rate. On the other hand, there’s no time to waste because too many things are pointing to a need to raise.”

The meeting is held two days after Standard & Poor’s cut Serbia’s credit rating one step to BB-, the third level below investment grade. S&P cited Serbia’s deteriorating economic outlook and changes to the central bank law that undermine its independence. The downgrade sent the dinar to a record low, prompting the central bank to sell euros and curb its declines, as months of the dinar weakening begin to weigh on prices.

The dinar has been Europe’s worst-performing currency, with a 9.5 percent drop against the euro, according to data compiled by Bloomberg. It traded at 119.0890 at 10:25 a.m. in Belgrade today.

Budget Deficit

Serbia is struggling to avoid a second recession in three years after the economy contracted 0.6 percent in the second quarter, following a 1.3 percent decline in the three months through March. The budget deficit will probably top 6 percent of GDP this year and public debt may widen to 55 percent of GDP by the end of the year from 42 percent in 2011, S&P said.

The central bank raised its benchmark interest rate by a total of 75 basis points to 10.25 percent in June and July, as price pressures re-emerged and inflation doubled to 5.5 percent in June from a 30-year low of 2.7 percent in April as the weaker dinar fuels import prices.

The bank also tightened reserve-requirement rules to drain liquidity from the market because of depreciation pressures on the dinar and the government’s expansive fiscal policies. These changes have sent the budget gap to almost three-quarters of the full-year target in the first six months through June.

IMF Talks

Prime Minister Ivica Dacic’s cabinet, sworn in on July 27, is drawing up a plan to stave off bankruptcy as the fiscal and current account deficits jeopardize Serbia’s external liquidity. The main test for the ruling coalition of former Slobodan Milosevic’s colleagues is how soon they restore talks with the International Monetary Fund, which suspended a $1.3 billion precautionary-loan program in February amid signs the previous administration was slipping on budget and debt targets.

New central bank governor Jorgovanka Tabakovic said Aug. 6 that Serbia may after all need a loan from the IMF due to its deteriorated fiscal position. Milica Bisic, an adviser on tax to the Finance Minister, told NIN magazine that the entirely new loan agreement is likely to be agreed toward the end of 2012, when the government adopts next year’s budget.

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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