Serbia’s central bank will probably halt its tightening cycle by leaving borrowing costs unchanged tomorrow as it assesses price pressures before cutting rates to spur economic growth.
The Narodna Banka Srbije will keep the benchmark one-week repurchase rate at 11.75 percent after raising it eight times in the past nine meetings, according to 17 of 24 economists in a Bloomberg survey. Six expect a quarter-point increase, while one sees a quarter-point cut. The bank will announce its decision at noon tomorrow in Belgrade.
“They will probably hold it this month because there will be no sharp drop in inflation, but it’s only a matter of time before they start lowering the rate,” said Ratko Guduric, the deputy head of treasury at Vojvodjanska Banka AD in Belgrade.
Rate-setters pledged on Feb. 13 to consider changes to monetary policy as inflation pressures based on food and regulated prices disappear. Vice Governor Veselin Pjescic said the current rate level represents a sufficient degree of restrictiveness as long as current forecasts, including an economic contraction of 0.1 percent and 2 percent inflation in the euro area, are met.
“They need to cut the repo rate because of ample liquidity, declining yields on domestic Treasury bills and the stable dinar,” Jasna Atanasijevic, chief economist at the Belgrade-based Hypo Alpe-Adria Bank AD, said by phone. “This all shows that neither the market nor corporate clients need such high interest rates.”
The trend in Serbian rates has run counter to others in the region, where borrowing costs are falling to halt economic slowdowns amid Europe’s debt crisis. The National Bank of Serbia wants to ease price pressures stemming from regulated price increases and expanded dinar liquidity.
Inflation has been accelerating since April 2012, when it fell to a 30-year low of 2.7 percent, due to rising food costs amid a drop in farm output. The rate reached 12.8 percent in January and is expected to peak at 14 percent through April. The central bank wants to bring it down to 4 percent, plus or minus 1.5 percentage points, by December.
Prices continued to rise even as the economy fell into its second recession in three years and consumer demand contracted as wage growth remained tame and unemployment increased.
Finance Minister Mladjan Dinkic said March 6 he will ask the central bank to lower interest rates and manage the dinar’s exchange rate to bolster economic growth and exports.
The central bank will be “very cautious about relaxing policy and cutting the benchmark interest rate,” said Ljiljana Grubic, analyst with Raiffeisenbank AD in Belgrade, who sees a 20 basis-point increase in the rate to reflect “the inflation targeting framework” and “concern over a risk of sudden outflows.”
Prime Minister Ivica Dacic’s Cabinet has relied on external borrowing rather than foreign direct investments to finance the budget deficit, which the government wants to narrow to 3.6 percent of economic output from more than 6 percent last year.
Bond buying by central banks in the U.S. and the euro region has stoked appetite for riskier emerging-market assets, allowing junk-rated issuers such as Hungary and Serbia, which are both in recession, to raise funds at a lower cost.
Serbia is “a flow magnet,” Moscow-based VTB Capital analysts said in a March 6 note to investors.
Both yields and the dinar have been “driven by international flows, which have so far been persistent and solid,” and that is “unlikely to change in the near future, as Serbian domestic rates are some of the highest in the world and global risk appetite is strong,” it said.
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