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Serbian Central Bank to Use Direct Repos as Main Policy Tool

Serbia’s central bank will shift to direct repurchase operations on July 18 to address a liquidity strain sparked by policy-tightening measures introduced in June.

“In line with previous announcements and the current liquidity situation, the Executive Board of the National Bank of Serbia has decided to set repo operations instead of reverse repo operations as its main policy tool,” Vice-Governor Bojan Markovic told Bloomberg by phone today.

The central bank raised today its main interest rate by a quarter-point to 10.25 percent, the second increase in two months following a 50 basis point boost on June 7. It also tightened reserve requirement rules to drain liquidity from the market amid the government’s fiscal expansion and depreciation pressures on the dinar.

Since it started inflation targeting in August 2006, the central bank has used reverse repo operations to drain excess liquidity as high interest rates attracted both domestic and foreign investors to park their funds with the Belgrade-based Narodna Banka Srbije.

The decision will be published in the Official Gazette by early next week allowing the bank to implement the change in its main policy tool, Markovic said, adding the bank will take excess liquidity from banks only occasionally in the future via “fine-tuning” operations.

The new repo operations will be conducted at a multiple price, offering banks a limited amount of cash with the benchmark two-week repurchase rate serving as the minimum price, he said. The central bank will take dinar-denominated Treasury bills and bonds as collateral.

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