Serbia Cuts Key Rate for Third Month as State Curbs Spending

Updated on

Serbia’s central bank lowered borrowing costs to a record to help spur inflation and end a recession as the government pursues spending cuts demanded by the International Monetary Fund.

The National Bank of Serbia cut its one-week benchmark interest rate by half a percentage point to 6.5 percent after lopping off a combined percentage point in March and April, according to a statement on its website on Monday. Six of 23 economists in a Bloomberg survey forecast the move. Four predicted a quarter-point reduction and 13 saw no change.

Reasons for the rate reduction included “below-target inflation and still low inflationary pressures resulting from weak aggregate demand,” the bank said in the statement.

The policy easing came just hours before the IMF said the first-quarter budget result was boosted by one-time factors and needed to be treated with caution. While the bank is trying to lift inflation back to its 2.5 percent to 5.5 percent target range, the government pruned the budget gap by almost two-thirds from a year earlier in the first three months, mainly by cutting public wages and pensions.

Budget Consolidation

Yields on Serbia’s dollar bonds maturing in 2021 rose three basis points to 4.53 percent at 6:25 p.m., according to data compiled by Bloomberg. The dinar was 0.1 percent stronger at 120.70 to the euro. Policy makers also narrowed the interest rate corridor to plus/minus 2 percentage points from 2.5 points.

Finance Minister Dusan Vujovic said the central bank may be able to ease policy further, provided such moves don’t undermine the exchange rate and jeopardize economic stability.

“Room for monetary policy relaxation has been created and what’s more important, it will support economic growth and help create jobs,” Vujovic said after meeting with the IMF mission on Monday.

The IMF, which approved a stand-by loan to Serbia in February, has called on rate setters to gradually relax policy to support domestic demand during the fiscal tightening. The lender concluded the first review on the program on Monday, saying the agreed budget targets remained appropriate.

Softer Terms

Premier Aleksandar Vucic wants to soften the terms of the IMF deal, in which he committed to narrowing the budget deficit to below 4 percent of economic output by 2017. The government has avoided raising power prices and sold only one of the 500 companies that it had committed to resolving because they suck about $1 billion from the budget in subsidies each year. It has also delayed an overhaul of the country’s biggest utilities.

Government and central bank officials have been somewhat upbeat about the growth outlook for the biggest former Yugoslav republic, which they see stagnating in 2015 instead of undergoing a second year of recession.

The economy contracted 1.9 percent in the first quarter from a year earlier, compounding a 1.8 percent drop the previous three months. Industrial output also declined and the trade deficit widened, while foreign direct investment fell 16.4 percent the first two months of the year.

The central bank may use a “strong and stable dinar, backed by nice risk appetite for local debt amidst ECB quantitative easing,” as reasons to extend the easing cycle, Ljiljana Grubic, an economist at Raiffeisenbank AD in Belgrade, said in a research note.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE