Serbs Cut Rates to Record During Austerity-Driven Recession

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Serbia’s central bank lowered borrowing costs to a record after a recession spurred by an IMF-endorsed austerity program extended for a fifth consecutive quarter.

The National Bank of Serbia cut its main interest rate by half a percentage point to 6 percent after reducing the benchmark by a combined 1.5 percentage points in March, April and May, according to a statement on its website on Thursday. Six of 23 economists surveyed by Bloomberg forecast a quarter-point cut, six predicted a half-point reduction, and one saw rates falling to 5.5 percent. Ten expected no change.

“Inflation is below the lower end of the tolerance band,” the central bank said in the statement. “It’s expected to return to within target in the second half of the year.” The decision was made based on “prevailing disinflationary pressures” partly stemming from tighter fiscal policy and monetary easing by the European Central Bank, it said.

While inflation remains below the central bank’s target, Prime Minister Aleksandar Vucic’s government is pursuing a cost-cutting program agreed to with the International Monetary Fund. It narrowed the budget gap more than planned in the five months through May.

On Tuesday Finance Minister Dusan Vujovic said the cabinet cut this year’s planned budget deficit by 41 percent to 114 billion dinars ($1.1 billion). It originally planned a 193 billion-dinar shortfall, equal to about 5.9 percent of gross domestic product.

Cutting Room

Yields on Serbia’s dollar bonds maturing in 2021 rose 4 basis points to 4.812 percent by 1:55 p.m. in Belgrade, the highest since Feb. 11, according to data compiled by Bloomberg. The dinar traded little changed at 120.49 to the euro.

The central bank “feels emboldened by the gradual steps and the more balanced policy mix to loosen its stance,” Roxana Hulea, Societe Generale SA strategist, said in an e-mail. There may be room for another half-point cut, she said.

“Squeezing real rates too much would trigger a wave of profit taking without some structural progress,” Hulea said. “At those levels investors would step back and reassess, it would not be the kind of crawling profit target.”

The inflation rate stood at 1.8 percent in April, remaining outside the central bank’s target of 4 percent, plus or minus 1.5 percentage points. The economy shrank 1.8 percent from January to March from a year earlier.

The government is trying to ease the conditions of some parts of the IMF program and will raise electricity prices by 12 percent as of August, instead of 15 percent.

Serbia is also trying to extend deadlines to turn around or shut down most of about 500 unprofitable companies that are draining about $1 billion from the budget in subsidies each year. It also wants to end public wage and pension cuts before the IMF program ends in 2017.

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