Serbia's Central Bank Cuts Rates to Spur Inflation, Economy

  • Decision a surprise to 14 of 23 economists, who saw no change
  • Serbian GDP shrank in 2014 and inflation remains below target

Serbia cut borrowing costs for a second month, taking advantage of a stable currency as it seeks to rev up inflation and boost economic growth.

The National Bank of Serbia lowered its one-week repurchase rate to 5 percent from 5.5 percent after an unexpected half-point reduction in August, according to a statement Thursday on its website. That was in line with the predictions of four of 23 economists surveyed by Bloomberg. Five analysts predicted a decrease to 5.25 percent and fourteen forecast no change. Policy makers said they also cut mandatory reserve ratios by cumulative six percentage points over six months to unlock liquidity for more lending.

The biggest former Yugoslav republic, which relies on the neighboring European Union for trade and investment and the U.S. for debt financing, is forging ahead with monetary easing after the European Central Bank presented a revamped quantitative easing plan and a week before the Federal Reserve considers raising rates for the first time in almost a decade. Serbia’s sixth reduction this year is seeking to aid the economy exiting its third recession since 2009. Consumer-price growth has stayed below the central bank’s target range of 2.5 percent to 5.5 percent for 17 months.

“With the decision to lower not only the benchmark interest rate but also the reserve requirement rate, and considering weak inflationary pressures, monetary policy is contributing to further economic recovery,” the bank said in the statement. Inflation may reach the target band toward the end of 2015 or the start of next year and will hover near the lower end of the range before then, it said.

The dinar traded 0.1 percent weaker at 120.4091 against the euro as of 3:17 p.m. in Belgrade, data compiled by Bloomberg showed.

Low, Stable

“Inflation has been low, the dinar stable, growth is accelerating and after the ECB’s decision last week it would be difficult to justify a decision to hold the rate,” Branko Srdanovic, a partner at Belgrade-based Associates Treasury Solutions, said before the announcement. “A revised GDP growth forecast to 0.5 percent certainly leaves room for cuts.”

Policy makers are pressing ahead with monetary easing days after the International Monetary Fund said that earlier reductions were appropriate and will aid a recovery. “Further policy rate cuts should take into account inflation expectations, the external financing environment, and the progress in fiscal consolidation,” it said.

Austerity Plan

Weighing down on inflation prospects is the government’s cost-cutting program, negotiated with the IMF. Premier Aleksandar Vucic’s cabinet has so far narrowed the budget shortfall more than planned through public wage and pension cuts. It still needs to fire thousands of public sector workers, close or sell hundreds of money-losing companies, invest more in big infrastructure and start reducing public debt to meet targets set out by the IMF program.

Another reduction by the central bank may be in the offing if inflation stays slow, according to Deanie Jensen, an emerging-market economist at ING Groep NV in London.

“The risk is that today’s move hastaken interest rates into dangerously low territory and in turn increased the economy’s susceptibility to adverse external shocks,” she said in a note after the announcement.

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