Serbia Will Probably Cut Rates as Prices Slow With Stable Dinar

Serbia’s central bank will probably lower borrowing costs for a third consecutive month as a stable currency allows policy makers to take advantage of slowing inflation.

The Narodna Banka Srbije in Belgrade will lower its one-week repurchase rate by a quarter point to 10.75 percent according to 13 of 24 economists in a Bloomberg survey. Two predict a half-point rate reduction and nine forecast the central bank will leave borrowing costs unchanged. The bank will announce the decision tomorrow at about noon.

A rate cut is justified by “falling CPI inflation due to high base effects, local demand weakness and postponed electricity price hikes for August,” Hypo Alpe-Adria d.d economists led by Hrvoje Stojic in Zagreb said in a note to clients today.

Serbian rate setters last month surprised the majority of economists by lowering the benchmark rate a quarter point, bringing the total easing since May to 75 basis points. Inflation slowed to 9.9 percent in May, dipping below 10 percent for the first time in nine months. The bank predicts the pace of price growth will slow to 4 percent plus or minus 1.5 percentage point by December.

The inflation rate peaked at 12.9 percent in October, fueled by regulated price increases and rising dinar liquidity, which forced the central bank to raise borrowing costs eight times in nine meetings through February even as the economy shrank.

‘Certainly’ Falling

Inflation almost “certainly” falling below 6 percent by October will “inevitably be accompanied by a cut in the repo rate,” Ivan Nikolic, member of the central bank Governor’s Council, the regulator’s supervisory body, told reporters in Belgrade yesterday. “Since it has an impact on the dinar exchange rate, it will be the big challenge for monetary policy to make the right balance,”

The dinar traded at 113.9760 per the euro at 10:58 a.m. in Belgrade, about 3 percent weaker than before the May 14 rate cut. The central bank has intervened 15 times since May 30 to prop up the currency, selling 325 million euros ($417 million), according to its website.

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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