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Serbia Seen Lowering Benchmark Interest Rate 8th Time Since June

Serbia will probably cut its benchmark interest rate for the eighth time since June as weak domestic demand and slowing growth keep inflation in check.

The Belgrade-based Narodna Banka Srbije will lower its two-week repurchase rate by a quarter of a percentage point to 9.25 percent when it meets on Feb. 9, according to 12 of 23 economists in a Bloomberg survey. One predicted a half-point cut to 9 percent while 10 saw the central bank holding rates.

Policy makers are weighing the domestic fiscal situation and Europe’s sovereign debt crisis for future direction. The inflation rate may fall below 5.8 percent by April and hover around the mid-target rate of 4 percent by the end of 2012. This would create room to lower borrowing costs further as long as the current easing cycle hasn’t weakened the dinar too much, analysts said.

“Slowing inflation will remain the key rationale behind their likely decision to cut the rate again,” said Ratko Guduric, the deputy head of Treasury Division at Vojvodjanska Banka AD, a member of the National Bank of Greece SA group.

Serbia is struggling to keep the economy from returning to a recession. Gross domestic product expanded 0.8 percent in the last quarter of 2011 from a year earlier, compared with 3.7 percent at the beginning of last year. The International Monetary Fund is expected to lower its 1.5 percent growth forecast for Serbia as the debt crisis weakens demand for the Balkan nation’s exports and weighs on capital inflows.

Weak Dinar

So far, the inflationary effect of the weakening dinar should be outweighed by a 17 percent drop in consumer demand in 2011, said Jasna Atanasijevic, the chief economist at Belgrade-based Hypo-Alpe-Adria Bank AD.

The dinar weakened 0.5 percent yesterday, closing at 106.5622 to the euro, according to central bank’s figures, extending its losses for the third consecutive trading day. It traded at 106.98 to the euro at 2:42 p.m. in Belgrade.

Analysts in the survey forecast a dinar rate of 105.25 to the euro at the end of February, down from last month’s median forecast of 104 dinars to the euro.

Any further dinar weakening “may keep the central bank’s hands tied,” Vladimir Vuckovic of the Serbian Fiscal Council, a three-member body appointed by parliament to monitor if the government complies with self-imposed fiscal rules, said in a phone interview.

The latest dinar declines may reflect investor concern over whether Serbia keeps its $1.3 billion precautionary loan program with the IMF in force, he said.

IMF Review

An IMF mission arrived in Belgrade for a week-long check on Serbian finances, two weeks after the lender’s board postponed the approval of the first review under the program, granted last September.

The IMF is concerned about Serbia’s budget, where borrowing and sovereign guarantees “deviate” from program targets by around 1 percentage point of GDP, or around 300 million euros ($393 million).

The central bank, whose mandate is to ensure financial stability and low inflation, may need to use policy instruments other than the benchmark rate to “jump-start the economy and encourage lending,” said Ljiljana Grubic, an analyst with Raiffeisenbank’s Serbian unit. She forecast no change in borrowing on Feb. 9.

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