Serb Central Bank Cuts Rates as CPI Returns to Target Band

Serbia’s central bank cut borrowing costs more than most economists forecast after a three-month pause, citing confidence in the government’s fiscal restraint as inflation returned to the target band and the dinar firmed.

The Narodna Banka Srbije in Belgrade, Serbia’s capital, cut the one-week repurchase rate by a half point to 10.5 percent, according to a statement on its website today. Four of 24 economists in a Bloomberg survey forecast the move. Eleven saw a quarter-point cut and nine predicted no change.

With September inflation the slowest in 16 months at 4.9 percent, rate setters are brushing off the advice of the International Monetary Fund to pause easing until fiscal consolidation takes root. The Washington-based lender recommended on Oct. 8 that Serbia remain cautious with loosening policy, which “has been appropriately put on hold.”

The central bank has no excuse to keep the “real interest rate above 6 percent” when the economy is “barely” growing, Jasna Atanasijevic, chief economist at Hypo Alpe Adria Bank AD in Belgrade, said by phone. Today’s rate cut probably won’t be the last in 2013 and there is room to “cut to 10 percent or even lower than that as long as the dinar is not depreciating and inflation keeps on falling,” she said.

The dinar strengthened to 113.9245 per euro by 3:44 p.m. in Belgrade, data compiled by Bloomberg show. The yield on Serbia’s 10-year Eurobond maturing in 2021 fell 3 basis points, or 0.03 percentage point, to 6.146 percent.

‘Implicitly Targeting’

The central bank cut the benchmark rate amid appreciation pressures on the dinar, having bought 35 million euros between Oct. 11 and Oct. 17 to weaken the currency.

The euro purchases can be interpreted as a sign that the bank is “implicitly targeting a nominal exchange rate rather than inflation,’ according to Ljiljana Grubic, an economist at Raiffeisen Bank AD in Belgrade.

The IMF called for ‘‘steadfast’’ and ‘‘credible’’ implementation of measures announced by Premier Ivica Dacic’s cabinet to contain public debt. The plan followed Deputy Prime Minister Aleksandar Vucic’s warning on Oct. 6 that the Balkan nation is ‘‘on the verge of bankruptcy” and must cut public wages and state subsidies to fend off looming insolvency.

The plan will rely on tax increases, a higher retirement age for women, crackdown on the shadow economy and lower subsidies to public companies.

“The executive board had in mind weaker risks related to fiscal developments,” the central bank said in the statement. “Weak demand, along with fiscal consolidation measures, will represent a strong disinflationary factor next year.”

GDP, Inflation

Serbia’s economy will grow no more than 0.5 percent next year, according to Oct. 14 estimates by Serbia’s Fiscal Council, a three-member body appointed by parliament to oversee the government’s fiscal compliance.

Inflation was the slowest in 16 months in September, with consumer prices rising 4.9 percent from a year earlier after a 7.3 percent increase in August. The central bank is seeking to keep price growth at 4 percent while tolerating a possible 1.5 percentage point deviation on either side. Inflation was last within the target band in June 2012.

Policy makers cut the key rate in May and June by a cumulative 75 basis points to 11 percent. They surprised most economists by holding borrowing costs in July after the IMF said relaxing policy would be premature.

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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