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Serbian Central Bank Leaves Benchmark Rate at 9.5 Percent

Serbia’s central bank left its benchmark interest rate unchanged for a third month as policymakers look to a new government following May 6 general elections for future policy direction.

The Belgrade-based Narodna Banka Srbije kept its two-week repurchase rate at 9.5 percent, matching the forecast of 15 of 23 economists in a Bloomberg survey. Three saw the need for a rate increase while five expected a reduction. Governor Dejan Soskic will hold a briefing at 2 p.m. in Belgrade.

Serbia is trying to avoid a second recession in three years as the nation prepares to vote for a new president, parliamentary lawmakers and local representatives. The economy may have shrunk 1.5 percent in the first quarter and will “gain pace” in the second half for full-year growth of 0.5 percent, central bank Governor Dejan Soskic said.

“We have assessed that there are factors that could be both inflationary and disinflationary in the coming period and we believe we have made the right decision,” about rates today, Soskic said at a news conference in Belgrade today.

While last year’s growth was aided mainly by foreign direct investment and net exports, net foreign direct investment this year will fall to 400 million euros ($527 million) from 1.8 billion euros in 2011, Vice Governor Bojan Markovic said. Lower investments will be offset by more borrowing, Soskic said.

Rate-Cut History

The central bank has shaved the main rate by a total of 3 percentage points since last June to contain the economic slowdown that has been triggered by Europe’s debt crisis.

Rate-setters see inflation bottoming out in April as weak demand keeps a lid on price pressures, with consumer-price growth picking up toward the end of 2012 when it will likely be “at the upper end of the tolerance target band,” Soskic said.

The bank targets an inflation rate of 4 percent, plus or minus 1.5 percentage points, at the end of 2012. The rate was 3.2 percent in March, compared with 4.9 percent in February, though price pressures may emerge in the second half of the year, Soskic said. Monthly inflation rates have been rising for three consecutive months.

The decision followed another drop in the outstanding repo stock, the funds banks park with the central bank for the rate it pays.

The outstanding repo stock, which the National Bank of Serbia treated as an important liquidity buffer in 2008 and 2009, when the country was affected the most by global financial turmoil, dropped to 89.5 billion dinars ($1.05 billion), the lowest level of since August last year.

New Focus

The central bank has shifted its focus to other policy instruments as it tries to encourage banks to lend more to cash-strapped companies amid sinking industrial and export activity.

Following months of pressure from businesses, the central bank amended reserve requirement rules. While the measure will release 300 million euros in foreign-currency liquidity, the central bank will drain 16 billion dinars to avoid pressures on inflation.

That should stabilize inflation, contribute to lowering credit costs and easier refinancing, stabilize the foreign-exchange market and encourage banks to search for longer-dated sources of financing, the central bank said.

Some inflationary pressures may derive from the weakening dinar, which has lost 4 percent since the beginning of the year, even as the central bank sold 558.5 million euros to contain it. Its stability will largely depend on policies aimed at maintaining a long-term fiscal position and making external liquidity sustainable, Soskic said.

Limited Scope

The central bank’s room to adjust interest rates, its key policy instrument, has been limited by concerns about the ability of the incumbent government of Prime Minister Mirko Cvetkovic to keep fiscal policies intact after it already slipped on targets in the first two months of the year.

Cvetkovic should leave it to new Cabinet to sell a planned Eurobond worth about 1 billion euros, because of the “credibility of the issuance,” Soskic said, though the moment should be picked based on ongoing market conditions.

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