Aug. 7 (Bloomberg) -- Serbia’s central bank will probably keep borrowing costs unchanged for a second straight month as a government overhaul sidelines a push for monetary easing.
The Narodna Banka Srbije in Belgrade will leave its one-week repurchase rate at 11 percent, according to 14 of 24 economists in a Bloomberg survey. Eight predict a quarter-point reduction, one sees a half-point cut and one forecasts a 0.75 percentage point drop. The monetary authority will announce the decision tomorrow at about noon.
The Balkan nation’s political leaders averted early elections on July 31 after the largest party agreed to a cabinet shuffle that led to the ouster of the finance minister and his party. The threat of a snap ballot sent yields on state bonds to the highest level in a month. The Serbian Progressive Party of Deputy Premier Aleksandar Vucic and Prime Minister Ivica Dacic’s Socialists are expected to reach a new coalition agreement and appoint new ministers by September.
“They will probably hold the rate because of the government reshuffle although everything else,” including a credit crunch, weak consumption and struggling investment, “warrants a cut,” Jasna Atanasijevic, chief economist at Hypo Alpe-Adria Banka AD in Belgrade, said by phone yesterday.
The dinar traded at 114.0680 against the euro at 2:56 p.m. in Belgrade, or 0.13 percent down on the day, according to data compiled by Bloomberg. The yield on government 10-year Eurobonds maturing in 2021 dropped to 7.20 percent from 7.22 percent yesterday, after rising 5 basis points, or 0.75 percentage point, since July 30, when the finance minister was ousted.
Serbian rate setters surprised most economists for two consecutive months by lowering the benchmark rate by a quarter point in June, bringing the total easing since May to 75 basis points, and holding borrowing costs in July after the International Monetary Fund said policy relaxation was premature.
“The scope for rate cuts in a country suffering from a severe ’twin deficit’ problem and which is on the sharp end of the deterioration in sentiment towards emerging markets is extremely limited, notwithstanding the economic rationale for much looser monetary conditions,” Nicholas Spiro, the managing director of Spiro Sovereign Strategy, commented in an e-mail.
With the Progressive Party taking over the ministries of finance and economy, investors will wait to see which policy changes are implemented, said Ljiljana Grubic, analyst with Raiffeisen Banka AD in Belgrade.
“Usually, the reason to oust the finance minister is to signal future policy direction except that reasons for the ouster this time are unclear,” Grubic said by phone.
Rate setters should proceed with caution because of a mounting fiscal risk after Dacic’s cabinet slipped behind its deficit target, Grubic said. The IMF has warned the fiscal gap may soar to 8.3 percent of gross domestic product this year without additional cost cuts, compared with a revised deficit target of 4.7 percent of GDP.
The IMF last month urged restraint in further policy easing while fiscal consolidation is implemented to avoid risks to inflation, the dinar and economic stability.
The central bank sees inflation falling within its target band of 4 percent, plus or minus 1.5 percentage points, by October. Price growth slowed to 9.8 percent in June. It peaked at 12.9 percent in October, fueled by regulated price increases and rising dinar liquidity, which forced the central bank to raise borrowing costs eight times in nine meetings through February even as the economy shrank.
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