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Serb Central Bank Should Focus on Inflation, FREN Says

Serbia’s central bank will have to deal with rising inflation in its next policy moves, even as the economy contracts and unemployment expands, the FREN economic institute said.

Inflation will exceed 10 percent by the end of 2012, with core inflation picking up in the second and third quarters as food costs rise after weak harvest, Milojko Arsic, FREN’s chief economist, said at a presentation in Belgrade today. While the economy “temporarily” emerged from a slump in the three months through June, it will probably contract 1 percent this year, in line with the government’s estimates, he said.

“Trying to support the economy with monetary expansion would be counterproductive,” and taming inflation “should be the priority of the Narodna Banka Srbije,” Arsic said.

The central bank kept its benchmark interest rate at 10.5 percent this month, after three consecutive increases since June. The bank targets an inflation rate of 4.5 percent this year, plus or minus 1.5 percentage points.

The economy may expand 2 percent in 2013 if western European economies start to recover, Arsic said. Economic activity in the second quarter was not sufficient to halt a further increase in unemployment, already at 25.5 percent.

The Balkan nation may see its credit rating lowered again by year-end given its high public debt and budget deficit, he said. Standard & Poor’s cut Serbia’s ranking one step to BB-from BB with negative outlook on Aug. 7, while Fitch Ratings revised Serbia’s outlook to negative from stable on Aug. 16.

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