Serbia Pauses Interest-Rate Increases as Economy Slows

Serbia’s central bank held its benchmark interest rate for the first time in four months, pausing a series of increases to bolster the dinar as economic growth slows.

The Belgrade-based Narodna Banka Srbije kept the one-week repurchase rate at 10.5 percent, it said today in a statement on its website. Six of 20 economists in a Bloomberg survey predicted no change, while six expected a quarter-point rise and eight forecast the rate to jump to 11 percent.

“Considering that the dominant factors that currently influence growth of inflation can’t be adequately influenced by the benchmark rate, the Executive Board decided to keep the current level of monetary-policy restrictiveness,” the bank said in a statement. The next rate meeting is Oct. 18.

Serbia is struggling to avoid a second recession in three years after the economy contracted 0.6 percent in the second quarter, following a 1.3 percent decline in the three months through March. Inflation is estimated to accelerate to 10 percent on rising food prices and increases in regulated prices by the end of 2012, according to the central bank.

“Any further tightening will depend on external factors and on the success of reigning in inflation expectations” as well as fiscal consolidation, the bank said.

Struggling Economies

Policy makers across Europe have eased rates, or considered doing so, to help their struggling economies as the euro region slips toward a recession amid budget-cutting austerity measures and a flare-up of the debt crisis. Hungarian policy makers lowered borrowing costs by a quarter-point to 6.75 percent on Aug. 28 and the Czech central bank lowered its two-week repurchase rate to a record-low 0.5 percent on June 28.

The dinar traded 0.2 percent stronger against the euro at 117.5948 at 3:26 p.m. in Belgrade after falling 0.8 percent earlier in the session.

The central bank raised rates in June by a half point, and by a quarter point in both July and August to sap dinar liquidity to curb the currency’s decline. The unit has lost 8.9 percent to the euro so far this year, the seventh-worst performance in the world among 178 currencies tracked by Bloomberg.

‘Exceptional’ Inflows

“The bank may be anticipating some exceptional foreign currency inflows and related dinar strengthening that others are not aware of,” said Jasna Atanasijevic, chief economist at the Belgrade-based Hypo Alpe Adria AD bank. A rate hike “seemed necessary to support the dinar against its constant weakening in 2012.”

The International Monetary Fund suspended a $1.3 billion precautionary loan in February amid signs the previous government was slipping on budget targets. Such loans are set aside for a country in case of an economic or currency crisis without recipients necessarily drawing on the funds.

An IMF delegation is to arrive in Belgrade on Sept. 10 to discuss the country’s macroeconomic stability, as well as a law clipping of the central bank’s autonomy, which was criticized by the lender, by the World Bank and the European Commission.

Serbia will ask the Washington-based lender for a new loan, Finance and Economy Minister Mladjan Dinkic said Aug. 31. He is working on a review of the 2012 budget to narrow the gap to 6.5 percent of economic output this year and plans to keep it under 4 percent in 2013.

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