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Serbia Raises Rates as Price Pressures Outweigh Growth

Serbia Raises Rates as Price Pressures Outweigh Growth Concern
The National Bank of Serbia has repeatedly urged lawmakers to quickly form a government following inconclusive May 6 general elections to trim the budget gap and limit public debt. Photographer: Oliver Bunic/Bloomberg

Serbia’s central bank raised Europe’s second-highest benchmark interest rate for a second month as price pressures outweighed concern that the economy is slowing.

The Belgrade-based Narodna Banka Srbije said in a statement that it increased the two-week repurchase rate by a quarter point to 10.25 percent today, following a half-point increase on June 7. Two of 23 economists in a Bloomberg survey forecast the move, while nine expected a half-point boost and 12 no change. The dinar lost 0.44 percent against the euro on the day, trading at 115.3800 at 4:33 p.m. in Belgrade.

Rate setters decided to raise borrowing costs “in order to prevent any spillover of inflationary pressures and to contribute to macroeconomic stabilization,” the bank said in the statement, adding that it sees inflation above its 4 percent target midpoint in the coming months.

With the euro region slipping toward a recession amid budget-cutting austerity measures and a flare-up of the debt crisis, governments across Europe have been putting off rate increases and considering easing to help their struggling economies.

Fiscal Plans

Serbia’s new governing coalition is drawing up a plan to stave off bankruptcy as a record budget deficit and political bickering threaten the country’s ability to finance itself. External liquidity indicators worsened in May, with the country spending 18 percent of GDP on debt repayments, the central bank said in a report yesterday.

The bank raised rates by a half point last month and tightened reserve-requirement rules to drain liquidity from the market because of depreciation pressures on the dinar and the government’s fiscal expansion that saw the five-month budget deficit widen 80 percent from a year ago.

It said monetary-policy restrictiveness in the coming period “will exclusively depend on” fiscal policy and how fast the government adopts and implements fiscal consolidation “along with a continuation of an IMF arrangement.”

Government Formation

The central bank has repeatedly urged lawmakers to quickly form a government following inconclusive May 6 general elections to trim the budget gap and limit public debt. Such moves would help avoid a further weakening of the dinar and make room to reduce interest rates to spur economic recovery.

The deficit hit 111.2 billion dinars in the first six months of the year, compared with a full-year target of 152 billion dinars, set in the 2012 budget. The six-month deficit also compares with a 61 billion-dinar target the IMF advised Serbia to pursue as a proof that fiscal policies remain on track even without an IMF program.

The lender suspended a $1.3 billion precautionary loan program in February amid evidence that Serbia was already slipping on agreed fiscal targets.

Prime Minister-Designate Ivica Dacic said his Cabinet will consider removing Governor Dejan Soskic once it’s sworn in later this month. Soskic may lose his job if he acts in discord with other state institutions, which seek to stimulate growth rather than “tighten the belt,” Dacic told the Tanjug newswire today in an interview.

Milosevic’s Fall

Since the fall of Slobodan Milosevic in 2000, two central bank governors were dismissed when new governments took office and changed laws, while one resigned over a disagreement on expansive fiscal policies and the lack of necessary public-sector reforms.

The governor is elected to a 6-year term, after being nominated by President and confirmed by Parliament. He can be replaced if permanently incapacitated for health reasons, sentenced and jailed for a crime, or if it’s established that his “unprofessional” performance and “serious misconduct” keeps the bank from “accomplishing of its primary objective,” according to the central bank law, which sets price stability as the primary goal.

Serbia’s gross domestic product shrank 1.3 percent in the first quarter while the fiscal gap widened to 7.3 percent of GDP in April and public debt reached at 51.1 percent of GDP at the end of March, exceeding the government’s self-imposed 45 percent limit. Inflation accelerated to 3.9 percent in May from a 30-year low of 2.7 percent in April.

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