Serbs Loosen Policy With Surprise Half-Point Rate Reduction

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Serbia’s central bank cut borrowing costs more than forecast, as a strengthening dinar gave policy makers room to spur weak inflation and fight recession.

The National Bank of Serbia lowered the one-week repurchase rate by half-a-point to 7 percent, it said in a statement on its website on Thursday. The decision, the second such reduction in two months, confounded the forecasts of a majority in a Bloomberg poll of 23 economists. Twelve surveyed saw no change, and six saw a quarter point cut. Five predicted a half-point move.

“Apart from low inflation, continued monetary easing was motivated also by a further decline in inflation expectations, which have lingered within the target band for over a year now, and persisting disinflationary pressures stemming from low aggregate demand,” the bank said.

The monetary authority has been beset by the need to kindle inflation that has languished below its target range of 2.5 percent to 5.5 percent for more than a year. It’s also trying to avert undercutting the dinar, which has been shielded by the third-highest interest rate in Europe after Ukraine and Russia. Rate setters have been cautious on monetary loosening, saying disinflationary factors including declines in food and commodity prices are temporary.

“Rate setters seem to have realized they are late with rate cuts,” Ljiljana Grubic, economist at Raiffeisenbank AD in Belgrade, said Thursday. “Today’s rate cut will contribute to dinar strengthening, as the extremely low-yield environment across the global markets will fuel the yield hunt on CEE markets.”

Yields on Serbia’s dollar bonds maturing in 2021 were little changed at 4.429 percent by 1:07 p.m. in Belgrade, according to data compiled by Bloomberg. The dinar was stable at 120.0023 per euro.

More Cuts

The International Monetary Fund, which approved a stand-by loan to Serbia on Feb. 23, has called on rate setters to gradually relax policy to support domestic demand amid fiscal tightening.

Inflation accelerated to 0.8 percent in February compared with a year earlier. The central bank has repeatedly asked the government to raise regulated prices to help it lead inflation back to the target.

Roxana Hulea, an economist at Societe Generale SA, sees the central bank cutting rates by a cumulative 1.5 percentage points this year.

“While caution is surely well-advised amid a turbulent global environment and remaining domestic uncertainties, pausing at this stage would unnecessarily postpone economic recovery,” she said in a note on Wednesday.

An IMF mission will be in Belgrade May 4-12 to check if Prime Minister Aleksandar Vucic’s government is sticking with policy targets agreed under the three-year program.

Wage and pension cuts have led the January-March budget deficit wider than levels agreed with the IMF. The government needs to raise electricity prices, reorganize state-owned gas and power companies, overhaul three chemical plants and close almost 200 unprofitable state businesses to prove their commitment to plan endorsed by the IMF.

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