Serbia’s central bank paused its tightening cycle as it assesses price pressures before cutting rates to spur economic growth.
The Narodna Banka Srbije in Belgrade left its one-week repurchase rate at 11.75 percent after raising it eight times in the past nine meetings. Seventeen of 24 economists in a Bloomberg survey predicted the move, while six forecast a quarter-point increase and one saw a quarter-point cut.
The bank “estimates the current level of restrictive monetary policy ensures that in unchanged circumstances, the inflation will come back to our targeted band by the year end,” it said in an e-mailed statement after the decision.
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.
The dinar trades at 112.0443 to the euro at 12:33 p.m. in Belgrade, compared with 112.0662 prior to the rate announcement, according to data compiled by Bloomberg.
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 12.4 percent in February 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.
“The inflation rate will drop due to the implementation of fiscal consolidation, the upcoming precautionary deal with the International Monetary Fund, the expected stabilization of agricultural prices and the announced adjustment of regulated prices,” the central bank said in today’s statement.
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.
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