Serbia May Hold Rates to Weigh Impact of Europe’s Debt Crisis

Serbia’s central bank will probably leave its benchmark interest rate unchanged tomorrow as policy makers bide time to assess the impact of the European debt crisis on the Balkan economy.

The Narodna Banka Srbije’s two-week repurchase rate will remain at 10 percent, according to 13 of 23 economists in a Bloomberg survey. Seven predicted a quarter-point reduction and three saw a half-point cut. The bank is due to announce its decision at about noon in Belgrade.

“The signals are quite contradictory,” said Dusko Vasiljevic of the CEVES economics research institute in Belgrade, who sees no change. “Inflation and the economy are slowing, which means they should cut fast. On the other hand, the risk of capital flight may require a hike, so they are best off if they hold the rate.”

Central banks in eastern Europe are weighing faltering growth prospects against weaker currencies after tightening policy earlier this year.

Monetary authorities in Poland today left the seven-day rate unchanged for a fifth meeting at 4.5 percent, while Hungary raised borrowing costs by 50 basis points to 6.5 percent on Nov. 29 to stem declines in the forint. The Czechs have left the benchmark two-week repurchase rate at 0.75 percent since May 2010 and said yesterday the next rate move may be in any direction depending on inflation risks.

‘Strong Reason’

The Serbian central bank has “a strong reason for a significant cut” based on cumulative inflation from May to October, which stood at an annualized 2.4 percent, said Jasna Atanasijevic, chief economist at the Serb unit of Austria’s Hypo-Alpe-Adria.

Inflation slowed to 8.7 percent in October from a peak of 14.7 percent in April, outside the target rate of 4.5 percent plus or minus 1.5 percentage points for the end of the year, and 4 percent, plus or minus 1.5 percentage points, at end-2012. The Belgrade-based central bank says inflation may return to its target in the first quarter of 2012.

“A cut would be justified in the context of their monetary policy framework and the models they refer to, because moves in the rate target inflation one year from now,” Atanasijevic said. A deepening of the Europe’s debt crisis and an excessive rate move may trigger capital flight, putting pressure on the dinar and fuelling inflation, he said.

The market sees the dinar ending the year at 103.5 to the euro, marking a 1.9 percent full-year gain, according to a Bloomberg survey. It traded at 103.12 to the common currency at 2:14 p.m. in Belgrade.

Capital Flight Risk

The main capital flight-related risk stems from the central bank’s outstanding repo stock, where banks have parked 111.92 billion dinars ($1.45 billion) in two-week maturities, said Atanasijevic.

The Belgrade-based National Bank of Serbia last cut its main rate by 75 basis points to 10 percent Nov. 10 on concern Europe’s debt crisis may sour the economic-growth outlook. Serbia’s economy is forecast to grow 1.5 percent this year, down from an original estimate of 3 percent.

The economy expanded 0.7 percent in the third quarter from a year ago, according to a flash estimate by the Statistics Office on Oct. 31, down from 2.4 percent in the previous three-month period.

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